Wednesday, December 21, 2011

It's the sort of question you would expect a child to ask in one of those Grimm Brothers fairy tales, a child that walks so far into the woods that it gets lost, and takes another wrong turn and then another, and the forest feels denser and darker all the time, and it doesn't even run around in circles to return to its trail of breadcrumbs, or it doesn't know, because they've all been eaten by the animals. And then night falls slowly.

That's how I increasingly picture our financial situation. We march forward full of faith and feigned innocence into uncharted territory, telling ourselves we will and must find a way out of this mess, boosted by the high priests of our economic belief systems, the media, economists and politicians.

The children in the fairy tales always escape from the dark in the end, but we're not those children. Getting lost in the woods because you ignore the warnings is in general not an act of bravery, but one of stupidity.

Characters in fairy tales serve to teach their young readers and listeners a lesson about the morals of their societies; these characters don’t perish, they get saved because they timely see the errors of their ways. A morality tale.

But whereas the children in these fairy tales go gently into a good night, we go blindly into a bad one.

Perhaps it's fittingly ironic that this time around the rally came before instead of after the announcement by ECB president Mario Draghi of €489 billion in cheap loans for European banks. It fits right in with all the other things we get totally the wrong way around. About 60% of those loans, by the way, are just regurgitated old stuff.

Looking at what they have come up with in episode 1001 of the bailout drama, and just a brief look will do, there's one conclusion and one only: what they say is not what they think.

The ECB claims that it "hopes" the banks will use the money to purchase peripheral debt, but the ECB knows they won't (and what sort of €489 billion deal depends on "hope" only?). It knows, because the ECB itself, along with other parties, has refused to guarantee that debt.

It may be presented as a good deal, but borrowing at 1% to get a 5% return is not all that attractive when you have a 50% chance of an 80% haircut. Or something along those lines.

The ECB also said they hope banks will use the money to loan out to consumers. Just as big a pile of doo-doo. Banks are shedding assets like they're fleas, because they need reserves. That is a solvency issue. Being able to borrow ever cheaper while handing out ever more doubtful collateral addresses a liquidity issue.

There are a few things that this sort of lending will indeed achieve. It will gobble up bad assets from private banks and transfer them to the risk of the public coffer. Nothing new there. The child just gets deeper into the forest, and the light starts fading. A step by step process perceived as progressing so slowly, it raises no alarm. It's still morally repugnant, but who in charge of this thing has any morals left at all in the first place?

Another effect of those €489 billion is that the divide between the ECB and Germany, in particular its central Bundesbank, will widen, and substantially so. Which endangers the entire Eurozone project.

Whatever plan Europe comes up with, be it the European Financial Stability Facility or the European Stability Mechanism, or this latest one from the ECB, there are only two countries left to carry the vast majority of the risk and the burden. One of those countries, France, will soon be downgraded. So will its banks. This will lead to a downgrade of the EFSF and, if there's still time, the ESM.

There will at that point be one country left to carry the entire rest on its shoulders. Germany's allies and relatively strong partners, Holland, Finland, are way too small to do any heavy lifting. Moreover, Holland is on the verge of a housing collapse.

The EFSF needs to be funded; it can only spend what it has received. Europe has been unable to agree on expanding the Facility. Which is why the ECB now comes with its loan plan. Which did lead to a market rally, but that rally fizzled as soon as the plan was announced, even though it was at least €100 billion larger than expected.

So France soon will no longer be a net contributor to the EFSF. Which is one of the main reasons the expansion didn't materialize. Hence, it's all Germany's responsibility, and Germany is smart enough to understand it's not strong enough to bear that responsibility.

And then out of left field comes Mario Draghi handing out half a trillion euros in loans to 523 different European banks that on average are just about to draw their last breath, selling off profitable assets because they're all buyers are interested in, and keeping the lousy ones, which they now can pledge to the ECB, with a huge chunk of the risk involved landing squarely on the shoulders of the German citizenry.

The chance that Berlin will now look even a lot more serious at cutting its losses while it can has become much bigger with Mr. Draghi's first substantial act as ECB president. It's deceptively simple, really. Germany can't guarantee Greek and Italian and Spanish debt with the risk waiting in the wings of France slumping badly. Not without risking its own wealth, its own coherence as a society, in the process.

Staying in the metaphor of the child lost in the darkening forest (and yes, the Grimm brotheres were German), it's like the child, after taking yet another wrong turn, has stumbled upon a big bad wolf.

And though it's already getting almost too dark to see, the last thing the child does notice is that the wolf looks nothing like its sweet old grandmother.

Roughly €300bn of today’s eagerly awaited LTRO tender is recycled old money from earlier support operations. The new money is €200bn. This alone is not going to shore up the sovereign states of southern Europe as they grind deeper into recession/depression.

Enjoy Mario Draghi's Santa Rally while it lasts. The euphoria is likely to dissipate once markets remember the sheer scale of the task at hand.

The banks are under massive pressure to raise their core Tier 1 capital ratios to 9pc by next June. This requires a €2.5 trillion adjustment according to the BIS’s Global Stability Board. Most of that is going to be done by slashing loan books – deleveraging in the jargon – since they cannot raise fresh capital at a viable cost and don’t wish to be nationalised.

So will this extra €200bn be used to buy Italian and Spanish bonds, or instead to plug a frightening number of leaks across the financial system? "In a deleveraging world, we doubt that this will be used in any meaningful way to buy sovereign bonds… given the amount of scrutiny under which banks are regarding their sovereign exposures," said Nick Matthews from RBS. "The operation is thus unlikely to have a long lasting confidence boosting impact, in our view."

Eurozone sovereigns must raise €1.6 trillion in 2012, and banks must raise another €700bn.

Here is the redemption calendar for Italian debt, if you like such stuff.Note on page 3 that Italy must redeem:• In January: €15.2bn of BOTs• In February: €17bn of BOTs, €25.8bn of BTPs, and €10.6bn in CTZs (€53.4bn)• In March: €17bn of BOTs, €14.9bn of BTPs, and €12.3bn of CCTs (€44.2bn)

This is quite apart from new debt issuance needed to cover the budget deficit as the economy shrinks again, starting with 0.2pc contraction in Q3 of this year even before Mario Monti’s austerity package.

I don’t wish to belittle the importance of what the other Mario has done at the ECB. As RBS says, he may have averted a Lehman-event that looked all too imminent two weeks ago. He has bought a few months.

Crucially, he has locked the Bundesbank even deeper into the EMU rescue machinery, since Buba is on the hook for much of this credit to banks in exchange for bus ticket collateral.

Of course, Buba is already deeply enmeshed through €465bn of "Target2" payments to fellow central banks. The more this goes on, the harder it is for Germany to extract itself from monetary union when the time comes. You don’t always stride across the Rubicon. Sometimes you slide unwittingly beyond the point of no return.

A few more clever wheezes like this and Draghi will have cut off any possible retreat by Germany, short of Götterdämmerung for everybody.

The small band of City specialists who really have their fingers on the pulse of the ECB are split on what happens next:

The Herr Draghi camp thinks he means what he says about respecting the EU Treaties and Lisbon’s Article 123 prohibiting monetary financing of deficits.

The Signor Draghi camp thinks he is slowly combining an alliance of ECB doves ready to spring a trap on the Bundesbank, with rate cuts to 0.5pc by February and then signals of forthcoming QE – most likely by playing the forward-looking "deflation card" and muttering about impaired "monetary transmission channels".

One notes that Signor Draghi dodged the crucial the question on QE in his interview with the Pink Paper on Monday. The transcripts show that he refused to rule out printing money. "We take that as a yes," said David Owen from Jefferies Fixed Income.

It always come down to the same question. Can the ECB doves engineer enough stimulus to head off disaster in Club Med, without causing a disgusted Germany to pick up its marbles and walk out.

Probably not.

And can any level of stimulus ever close the 30pc structural gap in labour competitiveness between North and South, still growing wider by the day?

The European Central Bank will lend euro-area banks more than economists forecast for three years in its latest attempt to keep credit flowing to the economy during the sovereign debt crisis.

The Frankfurt-based ECB awarded 489 billion euros ($645 billion) in 1,134-day loans, more than economists’ median estimate of 293 billion euros in a Bloomberg News survey. The ECB said 523 banks asked for the funds, which will be lent at the average of its benchmark rate -- currently 1 percent -- over the period of the loans. The ECB also lent banks $33 billion for 14 days in a regular dollar offering, up from $5.1 billion a week ago. The euro jumped half a cent to $1.3198.

Government bond markets may continue to rally if demand for the three-year loans exceeds 250 billion euros, Steven Barrow, head of Group of 10 currency strategy at Standard Bank Plc in London, said before the ECB announced the results.

Europe’s debt crisis has increased the risk of government and bank defaults, making institutions wary of lending to each other and driving up the cost of credit. The ECB is trying to ensure that banks have access to cheap cash for the medium term so that they can keep lending to companies and households. In addition to the longer-term loans, the ECB has widened the pool of collateral banks can use to secure the funds.

Italian and Spanish government bond yields have dropped since the ECB announced the loans on Dec. 8 as banks buy the securities to use them as collateral. French President Nicolas Sarkozy has suggested banks could use the loans to buy even more government debt.

'Carry Trades'"What the ECB wants is that the funds be used by banks to keep handing out loans," said Michael Schubert, an economist at Commerzbank AG in Frankfurt. "But there’s a second argument, which is to do carry trades by borrowing on the cheap at the ECB and buying sovereign bonds. We don’t know what the banks are using the money for."

ECB Vice President Vitor Constancio in a Dec. 19 interview predicted "significant" demand for the loans as banks face "very high refinancing needs early next year."

Some 230 billion euros of bank bonds mature in the first quarter of 2012 alone, ECB President Mario Draghi told the European Parliament this week. "Banks represent about 80 percent of lending to the euro area," Draghi said. "The banking channel is crucial to the supply of credit." He predicted banks will experience "very significant funding constraints" for the "whole" of 2012.

No Turning Point

Banks from the euro region need to refinance 35 percent more debt next year than they did this year, according to a Bank of England study. Lenders have more than 600 billion euros of debt maturing in 2012, around three quarters of which is unsecured, the study says.

The ECB is focusing on greasing the banking system to fight the debt crisis as it resists calls to increase its bond purchases to reduce governments’ borrowing costs. It will offer a second three-year loan in February and banks have the option of repaying them after a year.

"It’s very significant and very helpful for the banks," Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc in London, told Bloomberg Television. "But it’s not going to bring about a turning point in this crisis."

Once again we seem to have a discrepancy between what "credit" people think and what "equity" and "FX" people think. The broad market rallied strongly today, at least in part because of the LTRO.

On one thing, everyone agrees, the take up rate will be high. There will be strong demand for the LTRO. What differs is the impact that will have on the market.

At one end is a belief that banks will be borrowing this money so they can purchase new assets. The allure of carry will be too much to pass up, and with government encouragement, they will rush to purchase new sovereign debt and maybe even lend more. That will turn the tide in the European debt crisis since there will be buyers for every new issue, and the market can move on to "strong" economic data in the US.

The other end of the spectrum is that the banks will use this facility to plug up existing holes in their borrowing. They won’t have to rely on the wholesale market or repo market as much as they can tap this facility. It will take some pressure off of the "money market" as banks won’t be scrambling for as much money every day, or over year end, but it won’t lead to new asset purchases by the banks. Banks need to deleverage and that hasn’t changed. The bonds can have a 0% risk weighting, but that doesn’t mean anyone, including the banks, believe it. The road to hell is paved with carry. That is an old adage and likely applies here.

High Yield did well today (with HY17 outperforming HYG and JNK). Investment Grade did okay as well (LQD tightened on a spread basis, though it shows up as a loss for most retail investors). IG17 also was tighter as no one wanted to be hedged. Away from that, more exotic trades, like curve trades didn’t show a similar strength. These are the sorts of trades that would do well if everyone was looking for carry and thought the problems were solved. Little things like that further underscore how likely it is that banks will participate.

Most banks are overexposed to these risks in the minds of investors anyways. Will buying more of something that is risky really help? Will loading up on a single position to the point that it can wipe you out be deemed as prudent? I think banks that have managed themselves well to this point will be very reluctant to add significantly to their exposure. You may get some token purchases so they can tell their regulators that they are playing nice, but beyond that, they will wait and see if the situation is really fixed.

The reason banks are not buying more of these bonds has little to do with funding costs being too high. Risk and leverage are too high. That hasn’t changed here, and most credit people believe that this new funding will encourage new asset purchases. Without that, it helps the banks by reducing some uncertainty on their existing debt rollover needs (let’s not forget the hundreds of billions of bank issued debt that needs to be rolled this year), but doesn’t encourage asset purchases or balance sheet expansion.

Earlier today I had a bullish tone and did see 1300 and 1100 as being equally possible. With a 40 point move from overnight lows it seems like a lot, especially since to the extent I was right, it was for all the wrong reasons. I continue to believe that there may be an agenda behind the truth that is emanating out of Europe recently, but this LTRO plan doesn’t do it for me. With our models showing seasonality being strongest from close of business tomorrow until the 27th, it is hard to be short, but without real news, we will be fading this.

On the data front, I am a bit confused why housing starts going up is a good thing. The only industry that may be worse at predicting future demand than the airline industry, is the homebuilder industry. They build homes, it’s what they do. Carefully managing inventory to demand is not their strong suit. A story about great demand and shortages of homes for sale would be much bigger news and may warrant a rally, I put this in a neutral category, at best.

On the earnings front, it seems like as many companies are missing as beating. Oracle missed after the bell and is being punished. It is far from clear to me that the earnings story is that compelling, and the strength in the dollar is the last thing the nascent surge in manufacturing needs.

We have a political system that couldn’t agree that the sun comes up in the morning without holding special sessions. Their ability to provide any help to the economy is zilch and no matter how many times people say it, there is no strong evidence that "gridlock" and "a government that does nothing" is actually a good thing for stocks over the short term (even though it may be by far the best thing for the economy in the long run).

VIX is back to levels last seen in August. The fact that those levels preceded a sell-off is largely being ignored on a day the DOW moved up 337 points, but as far as I can tell, VIX is as much a "risk on" / "risk off" asset as anything else and has limited predictive value (as in none). Somewhere out there, the quants are analyzing the skew of longer dated options as a better tool that may retain predictive value, but that is complex, and requires effort, but is probably the work that is required to make some sense of what the "vol" market is telling us. It is definitely the sort of work that serious tail risk hedge funds and quant funds are looking at and analyzing.

Here is the "vol skew" graph function on the SPX on Bloomberg. As far as I can tell you would need to be either a rocket scientist or a Deadhead to understand it. I am neither, but am convinced that to the extent the vol market contains useful information, it is far more complex to figure out, than pulling up a VIX closing level.

Southern Europe's battered debt markets are basking in a glorious pre-Christmas rally as hedge funds and investors celebrate a blast of cheap liquidity from the European Central Bank.

Yields on Spain's three-month notes plummeted to 1.74pc on Tuesday from 5.11pc last month, leading euphoric moves across the eurozone periphery. Spanish 10-year yields fell below 5pc for the first time in two months, with credit rallies in Italy, Belgium, and Ireland.

Exuberance lifted Germany's DAX index by 3pc, the French CAC by 2.7pc, and FTSE 100 by 1pc, with ripple effects through commodities and risky assets worldwide.

The buying spree comes as markets wait for the ECB to turn on the monetary spigot. Funds are betting that an offer of unlimited bank credit for three years – long-term repo operations (LTROs) – will transform the underlying dynamic of Europe's debt crisis. Banks will be able to borrow at 1pc to buy Spanish and Italian bonds at 5pc or 6pc. It allows the ECB to prop up sovereign states without violating EU treaty law.

Lenders call it the "Sarko trade" after French leader Nicolas Sarkozy said the liquidity will allow each state to "turn to its banks" for finance. Markets have seized on the idea, hoovering up distressed debt in advance to lock in gains.

The ECB move is part of a string of fresh measures by the bank's new president Mario Draghi to head off a dangerous escalation of the crisis. "We are trying to avoid a credit crunch," he told Euro MPs on Monday, warning that EMU banks and states must together to raise €720bn (£602bn) over the first quarter of 2012.

This subtle form of 'credit-easing' includes a cut in the reserve requirement to free up €100bn in lending power, and looser rules to allow collateral-starved banks to pawn more of their loan books at the Frankfurt lending window. "Draghi's been smart," said Simon Ward, of Henderson Global Investors. "The spread available to banks is going to prove attractive. He has outmanoeuvred the Bundesbank by drawing it in deeper."

Yet it is unclear whether liquidity alone can stop investor flight from Club Med. European banks have already cut holdings of EMU bonds by €65bn this year, and are slashing loan books to meet the EU's core Tier 1 capital ratio of 9pc. The Basel-based Global Stability Board fears that deleveraging could reach €2.5 trillion over coming months, risking a shock to the system.

"This may help sovereign debt a bit but we don't think it is a game-changer," said Mark Schofield, rates chief at Citigroup, predicting that banks will use the money to plug other holes and cover a dollar funding squeeze. "Most banks already hold too much of their own government's debt. It may take coercion to make them buy more."

Jacques Cailloux from RBS said over-excited markets may latch on to a big headline number at today's tender – perhaps €500bn – but most of this will be recycled money from old support operations. "The new liquidity will be just €100bn or €200bn. This at least prevents a Lehman event in the banking system but it doesn't solve the fundamental problem," he said.

There are nagging concerns over how long the ECB itself can keep shouldering the eurozone burden, given that it has no sovereign entity behind it. The three-year LTRO is like a 'double-up' Martingale bet. It may save the day but it also concentrates risk further for the Bundesbank and other central banks in the eurozone system, as well as private banks.

The ultimate disaster could be even worse if it all goes wrong.

Away from moves driven by the ECB's actions, stockmarkets were also buoyed by an unexpected boost to Germany's economic outlook. Despite a gloomy forecast earlier this month, the respected Ifo Institute said its latest monthy index showed business confidence had increased to 107.2 points from 106.6.

Respondents told Ifo that while the current situation was bleak, they expected the economy to improve over the next six months. Economists had expected confidence to fall. Hans-Werner Sinn, president of Ifo, said: "The German economy seems to be successfully countering the downturn in Western Europe." German consumer confidence was also up, according to GfK data.

There was less optimism across the border. Jean-Pierre Jouyet, head of France's AMF securities regulator, admitted it was unlikely his country would keep its AAA rating. He said: "Keeping it would need a miracle but I want to believe it can happen."

Making it happen will require the bondmarkets to support the €178bn of debt France plans to issue during 2012. The French debt agency said the total issuance, which is needed to fund its €78.7bn budget deficit and €97.9bn of debt, will be lower that €184bn issued this year due to austerity measures.

Fitch, the rating agency that last week warned France had "slightly higher than 50pc" chance of being downgraded, extended its warning to the AAA-rated European Financial Stability Facility (EFSF) saying it would face a downgrade if France lost its rating.

"France is the most exposed of the 'AAA' euro member states to a further intensification of the eurozone sovereign debt crisis. It provides €158.5bn of guarantees plus over-guarantees to the EFSF guarantee pool under the framework agreement," Fitch said in a report.

European leaders will conclude their plans to extend an extra €150bn to the International Monetary Fund (IMF) in "early 2012" – including the UK's possible contribution alongside the G20.Martin Kotthaus, a spokesman for the German finance ministry said: "The UK said yesterday they want to see within the context of the G20 to what extent they will want to contribute to raising the fire-power of the IMF, and I expect these questions and details could be settled by early 2012."

Separately Dexia, the Belgian-French bank, said it was progressing with its break-up with a sale of its Luxembourg subsidiary to Qatari investors for €730m – less than the expected €1bn.

Banks worldwide would be forced to disclose their regulatory capital positions in a common template to make it easier for investors to compare institutions under a proposal put forward on Monday by the Basel Committee on Banking Supervision, which writes global rules for the industry.

Currently banks announce their core tier one ratios – a key measure of bank safety – but are not required to explain how they are calculated and how they relate to the figures in their published financial statements. This loophole has made it hard for investors to gauge how strong banks are and regulators fear that some institutions are using the process to improve their reported results.

The problem is expected to get worse over the next seven years as banks are forced to make the transition into the tougher "Basel III" requirements. During the switch, preference shares and other debt instruments that previously counted towards the numerator of the capital ratio will be gradually phased out.

"To enable market participants to compare the capital adequacy of banks across jurisdictions, it is essential that banks disclose the full list of capital items and regulatory adjustments," the committee said in its report.

A standardised disclosure form would take some of the pressure off the European Banking Authority, which has had to battle national regulators over different definitions of capital while conducting its pan-European Union stress tests.

The regulators proposed that banks not only be required to disclose their capital but also make clear how much of it will be gradually phased out between now and 2018.

"Investors will view the proposals positively as they map out the journey from accounting equity to the all-important regulatory measure," said Richard Barfield of PwC. "That said, weighing a turkey accurately does not make it fatter. The challenge for the industry is not measuring equity or capital ratios. The challenge is growing the profits to create more equity."

Analysts said they wished the template proposal also addressed the denominator of the capital ratio, made up of risk-weighted assets because it has been a matter of controversy. Bankers have accused their competitors of "fudging" their risk calculations to make themselves look stronger. "Better disclosure is definitely a plus, but aren’t we all worried about risk-weighting inconsistencies which won’t be dealt with by this?" asked one analyst.

Even as the Basel Committee zeroed in on capital, its subgroup that works with insurance and securities regulators put out a consultation on how best to supervise financial conglomerates to avoid regulatory "blind spots". The Joint Forum warned supervisors to take into account unregulated entities when calculating capital needs and urged countries to designate one agency to take charge of supervising financial groups that engage in a broad range of business lines.

European banks will have to raise nearly €200bn ($260bn) in new capital or cut their balance sheets by nearly 20 per cent, to achieve the tougher new Basel III banking reform rules that start taking effect in 2013, a new study has found.

The study by the Boston Consulting Group looked at the efforts of 145 large banks worldwide to comply with that ratio and found they need to raise €354bn in capital on top of what they had at the end of 2010 or cut their risk-weighted assets by €5tn or 17 per cent. Banks in Europe had significantly further to go than those in the US and Asia, which each faced a collective shortfall of slightly less than €70bn.

The global Basel III package aims to make banks more resilient by forcing them to hold more, better quality capital against unexpected losses. The rules, which are set globally, require banks to hold core tier one capital equal to 7 per cent of their assets adjusted for risk or face restrictions on paying bonuses and dividends.

The study measured the European shortfall at €221bn, but roughly 20 per cent of that will be covered by the end of this year, the authors said. They estimated that European banks have already cut risk weighted assets by 5 per cent.

Officially, the Basel III rules phase in over a nine-year period through 2022, but the BCG research found that big banks are already moving to comply and most are planning to make a big effort toward achieving the standards by 2013. "Banks want to stay ahead of regulatory timetables as a demonstration to investors that they are financially strong," said Ranu Dayal, the BCG senior partner who led the work.

EU banks face an additional push from this month’s European Banking Authority stress tests which required them to achieve a 9 per cent ratio by 2012 using a somewhat looser definition of capital. The BCG study said the EBA rules effectively compress the time frame for meeting the Basel III requirements. Quick action could do much to strengthen the shaky European financial system but, collectively, the banks’ plans could pose a threat to the broader economy if they chose to cut lending rather than raise capital.

BCG notes that some banks may also seek to cut their RWAs by tinkering with the models they use to measure risk, a process known as "optimisation", and that the industry is lobbying hard to water down the Basel III proposals that sharply limit what can be counted as core tier one capital. Many bank chiefs are reluctant to raise additional equity because share prices are relatively low.

The BCG study suggests the banks are in a much better position than they were at the end of 2009, when research by McKinsey found that European banks might need to raise €600bn in new core tier one capital.

Is it possible that the European Central Bank (ECB) doesn't want to intervene to end the debt crisis is because, whisper it quietly - it can’t afford to?

Every day political and economic leaders demand that the ECB is made the lender of last resort and embarks on a policy of quantitative easing, like the Bank of England or America’s Federal Reserve.

Timothy Geithner, David Cameron and Nicolas Sarkozy are advocates. Mariano Rajoy in Madrid was the latest. Yesterday the Spain’s new prime minister used his inaurgural speech to commit his country to austerity measures that, he said, was a "thankless task, like that endured by parents who struggle to feed a family of four with enough money for only two". But he also begged for the ECB to become the lender of last resort.

But Germany’s refusal is absolute. And so is the ECB’s. Yesterday Mario Draghi said: "The treaty forbids monetary financing," he said. "We want to act within treaty. Losing credibility for the central bank is not going to do any good to market confidence or euro design."

Is Germany really that heartless? In part the answer is yes: some economists reckon there is nothing - and no country - Merkel wouldn’t sacrifice on the altar of 2pc inflation in Germany.

But Open Europe reckons there’s a big financial hurdle too: the ECB has already intervened massively - through its bond buying programme and support for banks - and is now dangerously exposed to the sinner states already.

The think-tank’s report says: "Through its government bond buying and liquidity provision to banks, the ECB’s exposure to the PIIGS has now reached €705bn, up from €444bn in early summer. This is an increase of over 50pc in only six months and shows how, contrary to popular belief, the ECB is already intervening quite heavily in the markets."

The problem is with the banks as well as the sinner states. The ECB has made supporting Europe’s beleaguered banks one of its core policies. It’s opened its doors and lowered its collateral requirements.

In practice, banks are able to both borrow and dump low quality collateral in one go. Open Europe says "though not all of these assets are bad or ‘toxic’, they are extremely difficult to value." Sound familiar? As in the previous banking crisis, this is all well and good - as long as this is a liquidity not a solvency problem.

Politicians can't be sure, yet Sarkozy and Christian Noyer, the Governor of the Bank of France, have argued the banks should stock up on sovereign debt. Yesterday Draghi said the same. If the sovereign debt plunges, the banks will need more support; and the ECB will take on the risk. Open Europe said encouraging the banks to "load up on risky sovereign debt just to keep the eurozone ticking over in the short-term" could amount to a "spectacular own goal" by the ECB.

Of course central banks can in theory expand their balance sheets as much as they like. In practice, like everyone else, they have to maintain the confidence of the markets. And at this rate, as Open Europe says, "it remains unclear how the ECB would cover losses in the event of a sovereign default."

The ECB can only absorb so many losses before it has to either ask for more capital from member states or print more money - both of which would be politically impossible and damaging to the ECB’s standing.

Faced with these options, Draghi’s opposition for either a massive bond-buying programme or direct help for a eurozone state, will necessarily remain as staunch as Germany’s.

Governments in Europe are tying themselves in knots to prop up their banks, desperate to blunt the cost and embarrassment of a fresh wave of taxpayer-funded bailouts.

In Italy, for example, the government is encouraging banks to buy public properties that the banks then can use to borrow money. As part of a broader deficit-reduction program in Portugal, the government essentially is borrowing money from bank pension funds and could use some of the funds to help state-owned companies repay bank loans.

Governments in Germany and Spain also are using unorthodox measures to support their ailing banks.

The unusual moves come as euro-zone countries are under growing pressure to reel in soaring borrowing costs by showing investors in government bonds that their budgets are under control. In addition, bank bailouts are politically toxic, especially for governments that have sought to reassure markets about the health of their banking systems.

Some economists say such moves aren't an adequate substitute for a broader rescue package that would include recapitalizing the lenders and helping them issue new debt. "Most of these backdoor-type schemes seem to be limited in size and don't address the broader problem," said Jacques Cailloux, chief European economist at Royal Bank of Scotland.

In some ways, the recent efforts are emblematic of what critics view as Europe's piecemeal crisis-fighting measures. In the past few years, individual governments in countries like Ireland, Germany and Spain have recapitalized their banks. The European Central Bank this week is making it easier for banks to borrow emergency funds, by offering three-year loans and accepting a wider range of collateral.

But there has been widespread resistance to adopting sweeping measures aimed at banks' deep underlying problems. Some of the recent European plans resemble the supplemental measures adopted by the U.S. at the height of its financial crisis.

In November 2008, the Federal Reserve launched the Term Asset-Backed Securities Loan Facility to resuscitate the securitization market and lending to consumers and small businesses. That was followed about four months later by the Public-Private Investment Program, designed to help rid banks of their troubled assets.

But those programs were sideshows to the U.S. government's sweeping recapitalization of hundreds of banks, both strong and ailing, which played a key role in restoring confidence in the industry. In Europe, no such program exists.

The Italian government has been among the most innovative at finding ways to help its banks conserve capital or come up with fresh funds. The country's five top banks were holding a total of €156 billion ($202.8 billion) of Italian government debt as of Sept. 30, and the plunging values of those bonds have raised concerns about the banks' viability. As a result, banks have struggled to borrow money from traditional sources, which are now wary of lending to the banks.

A provision tucked into the Italian government's budget law last month is designed to defuse some of those pressures. It allows the banks to use their government bonds to purchase army barracks, office buildings and other state-owned real estate that the government has been trying to sell.

The government would then lease the properties back from their new owners. And the banks can package the income-producing properties into asset-backed securities, which can be pledged as collateral with the ECB in exchange for loans, analysts say.

Italy's real-estate-for-sovereign-bonds maneuver also gives a boost to the government. Not only can it rid itself of unwanted properties, but the government also will be able to retire the bonds that banks use to purchase the real estate—thereby reducing Italy's heavy debt load.

In Germany, Commerzbank AG is in talks with the finance ministry to transfer part or all of its troubled real-estate finance unit Eurohypo into a government-owned "bad" bank. The bank and government are in talks about ways to structure the deal so it isn't considered a bailout, possibly by protecting the government against some losses or paying the government a nominal fee, according to people familiar with the matter.

That is an important stipulation. Commerzbank executives have repeatedly promised they won't take more taxpayer money, following a 2009 bailout that still has the bank 25%-owned by the government. But Commerzbank needs to come up with €5.3 billion in new capital by next summer in order to meet the demands of European regulators.

In Portugal, the government is planning an intricate financial maneuver that could give the country's banks some relief from the mountains of unpaid loans they hold from Portugal's state-owned companies. The state just closed a plan to transfer banks' future pension responsibilities to the state balance sheet in exchange for €6 billion in assets, which include cash, stocks and bonds. Most of the money will help the government meet deficit targets.

But about €2 billion may be shifted to struggling government-owned companies, such as transport providers. Under the plan, these companies would use the funds to pay off debts to Portugal's banks.

"The move will allow debt repayments to public entities, contributing to a cut in loan-to-deposit ratios of Portuguese banks and helping the financing of the economy," Finance Minister Vitor Gaspar told parliament recently.

In Spain, the government used €5.2 billion in funds from the country's deposit-guarantee plan to clean up nationalized lender Caja de Ahorros del Mediterraneo and broker its sale to Banco Sabadell SA earlier this month.

Instead of raising more money through a Spanish government bailout fund, a central-bank spokesman said that tapping the deposit-insurance plan would leave the country's budget goals this year intact. The deposit-guarantee fund will be refilled early next year, and the government will provide a back-stop in the meantime.

While a potential short-term solution, economists say such moves are a reflection of European governments' piecemeal approach to addressing deeper bank problems, such as low growth, problem assets and sovereign exposures. Governments "haven't been proactive and gotten on top of the situation," said Gerard Lyons, chief economist at Standard Chartered PLC.

About 15 people turned out on a cold night at the Clarion Hotel in west Dublin last week to take part in an unusual business seminar. The attendees came from different parts of Ireland and had different backgrounds but they all had one thing in common: they were in debt and considering declaring bankruptcy in the UK.

"Most of the group had property portfolios and were sophisticated investors who just got caught out in Ireland’s property crash," says Steve Thatcher, director of IrishBankruptcyUK, a company aiming to tap into the growing trade of bankruptcy tourism from Ireland to the UK.

Ireland’s economic boom and bust, which led to a bail-out from the European Union and International Monetary Fund a year ago, has left households saddled with €185bn of debt. High unemployment and a 50-60 per cent fall in house prices, which has left up to 300,000 mortgage holders in negative equity, means tens of thousands of people have little hope of ever being able to pay back their loans.

But in Ireland, unlike in many western countries, bankruptcy is not an option for most people. Just 29 people were declared bankrupt last year and 17 in 2009. This compares to 135,089 bankruptcies in England and Wales, 20,329 in Scotland and 2,323 in Northern Ireland in 2010.

"It takes 12 years to be discharged from bankruptcy in Ireland compared to just one year in the UK. It is a no-brainer for people to relocate to the UK for a few months to free themselves of debts," says Mr Thatcher, who claims to be helping about 50 people through the UK insolvency system for a fee of a few thousand euros per client.

Successive Irish governments have been advised to reform Ireland’s punitive bankruptcy laws, which business leaders say inhibit the development of an entrepreneurial culture. The EU-IMF has made reform of the bankruptcy and personal debt regime a condition of its €85bn bail-out and set a deadline of next March to draw up new legislation.

Leaks from the Irish government suggesting the new law may set a three-year discharge period has prompted an intense lobbying campaign from banks and concern at the Central Bank of Ireland.

Matthew Elderfield, Ireland’s financial regulator, recently warned that too short a discharge period for people with mortgage debt could damage the banks, which have been recapitalised with €63bn in taxpayers’ money. "Any approach to restructuring needs to take account of the risk that it creates incentives for borrowers to cease meeting their obligations," he said.

But groups representing people in mortgage arrears say the banks will not begin writing off distressed mortgage debt until a bankruptcy regime is put in place. Many people are not waiting to see how, or whether, the government will act.

This month Sean Quinn, who three years ago was listed as Ireland’s richest man with a fortune of $6bn, declared bankruptcy in Northern Ireland, rather than in Ireland where he lives with his wife. By choosing Belfast over Dublin he should be discharged from bankruptcy within a year and he can hold on to his pension. Under the Irish bankruptcy regime pensions can be used to pay off creditors.

Mr Quinn’s bankruptcy was challenged in a Belfast court on Monday by Anglo Irish Bank, to which he owes more than €2bn.

John and Linda, who didn’t want to give their real names due to the stigma of bankruptcy in Ireland, declared bankruptcy in Wales to get rid of €300,000 mortgage debt on a house they bought at the peak of the boom in 2007.

In an interview with the Financial Times they said the most difficult part of the process was moving to Wales for several months to establish their main centre of interest in the country – a condition of UK bankruptcy law.

"My husband lost his job and we couldn’t keep up with the payments on our house. But we couldn’t sell it because it was worth only half our mortgage and the debt in Ireland would have followed us," said Linda.

The couple initially considered staying in Wales to make a new life. But they have since returned to Ireland where their house has been repossessed but they now live debt free. "It was the best thing we ever did," says Linda. "We don’t have the stress of the debts and even though we can’t get a bank account, it is not the end of the world."

European Union finance ministers held emergency talks on Monday in a bid to finalize a multibillion-euro loan to the International Monetary Fund and other steps to build a credible firewall around Italy and Spain, but continued political resistance means commitments are likely to fall short of expectations.

A target for a total contribution of €200 billion ($260 billion) in the form of additional bilateral loans to the IMF by the EU aren't likely to be reached, IMF and euro-zone officials said Monday, because the euro zone has to overcome objections to the deal from the U.K. as well as Germany's Bundesbank. Poorer Eastern European nations, such as the Czech Republic and Poland, have also expressed concerns that the deal is too expensive for them.

The teleconference of the 17 euro-zone finance ministers plus their 10 EU counterparts that don't use the euro focused on the details of the bilateral loans pledged to the IMF and the finalization of the permanent-rescue-fund treaty, the European Stability Mechanism, an EU official said.

A statement from the euro-zone governments after their Dec. 9 summit said the EU governments would provide "up to" €200 billion—with €150 billion from the euro zone—in bilateral loans to the IMF that could be used for lending to troubled euro-zone governments. They set Monday as a deadline for sorting out the technical details.

The additional IMF loans are a linchpin in the EU's latest plan to stave off a collapse of the euro zone, agreed to by a majority of EU nations at the Brussels summit earlier this month. The hastily called teleconference shows the urgency with which European leaders have to act and the hurdles they face.

"There will be an effort to get an agreement on the €150 billion committed by the euro zone but it's not certain it will happen today and it certainly looks like we'll fall short of the total €200 billion by all of the EU," said a senior IMF official with direct knowledge of the talks.

The 17 euro-zone governments may commit to move ahead with the bilateral loans to the IMF without the immediate support of the U.K., another euro-zone official said Monday. The U.K. didn't sign on to an agreement reached on Dec. 9 among the other 26 EU member states to commit to tougher fiscal rules. "The U.K. has a couple of formal problems," he said. "They think that the firewall that's been constructed is not fireproof enough."

EU governments must also overcome the resistance of the Bundesbank, Germany's powerful central bank. The Bundesbank is still in talks with the German government over IMF loans, and sees no urgency in that regard, a spokesperson for the Bundesbank said Monday.

Bundesbank President Jens Weidmann has signaled the central bank's willingness to contribute €45 billion in loans to the IMF, but only if other European and non-European countries such as the U.S. follow suit and the funds aren't specifically directed at Europe.

Facing re-election next year, U.S. President Barack Obama has already poured cold water on the IMF's largest contributor giving more taxpayer money to the IMF, saying Europe is rich enough to solve its own problems.

"If, for example, the U.S. and other important donors say they will not participate, then, from our viewpoint, it will be uncomfortably close to state financing," Mr. Weidmann said last week.

Euro-zone governments expected that a quarter of the €200 billion funds would come from EU members outside the euro zone, while they also urged other international contributors to consider additional lending. Countries that are currently under bailout programs and receiving IMF aid—Greece, Portugal and Ireland—weren't expected to contribute. But that could change, an EU official said Monday.

"Many questions about the €200 billion remain unanswered and the ministers will have to decide whether countries receiving financial assistance have to contribute," the EU official said. "If member states can't contribute then others may have to give more," he added.

A Greek government official didn't rule out a bilateral contribution by Greece to the IMF. "We have to wait and see what they [the finance ministers] say this afternoon," he said.

Irish Prime Minister Enda Kenny, however, has said his country wouldn't participate. An Irish official said on Monday that Dublin's position remains that program countries won't be contributing to the extra IMF funds.

So far, among EU members, only Denmark has made a clear commitment for contributing as much as €5.5 billion. Sweden has also signaled that it is ready to lend as much as 100 billion kronor ($14.3 billion) to support the fund's efforts to deal with the debt crisis in Europe, while among non-EU countries, only Russia has promised extra financial support of up to $20 billion.

The IMF official said there have been efforts to persuade London to make a minimum €30 billion loan to the Fund, but following Prime Minister David Cameron's move to veto an EU treaty change at the Dec. 9 Summit, that looks unlikely.

"The U.K. understands the need to give the IMF greater firepower, but it will consider a pledge at a different forum like the G-20. The politics behind a contribution that calls on the Bank of England to be part of a euro-zone member bailout are currently prohibitive," the euro-zone official said. "We all understood that by Mr. Cameron's stance at the last summit."

Euro-zone ministers will also discuss changes to the ESM treaty during the conference call, including the question of bringing the ESM forward into 2012 instead of July 2013, an EU official said.

The existence of the euro zone is "irreversible" and speculation about its breakup is "morbid," European Central Bank President Mario Draghi said Monday.

"I have no doubt whatsoever about the strength of the euro, about its permanence and its irreversibility. The one currency is irreversible," Mr. Draghi said at his first hearing of the European Parliament's Committee on Economic and Monetary Affairs since he took the helm of the ECB Nov. 1. A break-up of the currency union would have extraordinary costs, he added.

The ECB welcomes the latest decisions by European Union heads of states and governments for sound and transparent fiscal rules, as the "new fiscal compact is an essential signal, showing a clear trajectory for the future evolution of the euro area," Mr. Draghi said. Expectations that the summit would be a silver bullet that solves all issues were unrealistic and the agreement was less appreciated by markets than it would deserve, he added.

The design of the fiscal compact should reassure markets but more needs to be done, Mr. Draghi added. European countries need progress in the economic governance of the deeper fiscal union. They need to implement structural measures throughout the region, as austerity in itself by a single country won't produce the desired results. Austerity produces short-term economic contraction but structural reforms ensure long-term sustainable growth, Mr. Draghi indicated.

The ECB embarked Dec. 8 on "major" liquidity-providing steps for banks in the euro-zone to prevent a recession, as its mandate prevents it from buying bonds to finance governments, Mr. Draghi said. The ECB aims to head off the possibility of an economic slowdown or even a recession next year by providing unlimited liquidity to euro-zone banks, which are facing a credit crunch.

"We have to ensure whatever it takes that we don't have a recession coming from the funding pressure," Mr. Draghi said. Banks are also facing a capital shortage because "the situation has changed profoundly," Mr. Draghi warned. Amid capital pressures, banks may reduce lending, and that would be the worst alternative, he said.

Banks will experience a difficult period of funding constraints in the first quarter of next year and probably throughout all of 2012, and the ECB "wants to avoid a further slowdown in economic growth and a possible recession," Mr. Draghi said. The ECB is trying "to do its best" to avoid a credit crunch stemming from the lack of funding, he added. Avoiding a funding crunch is all the more important, since worries about banks' liquidity could easily turn into fears over their solvency, he said.

Calls have been mounting for the ECB to act as a lender of last resort to crisis-hit euro-zone sovereign states. The ECB must boost financial stability without weakening its credibility, Mr. Draghi explained, as a reason for the ECB rejecting large-scale government bond purchases. The ECB's mandate is more restricted to maintaining price stability than that of the U.S. Federal Reserve, Mr. Draghi said.

The ECB has been buying government bonds on the secondary market but those purchases, which are neither eternal nor infinite, are one of its most powerful tools, Mr. Draghi reiterated. Whenever the ECB sees its monetary policy has been paralyzed it has to renew and conduct the bond purchases, Mr. Draghi said.

The ECB's monetary policy is accommodative and the liquidity measures, which also include the broadening of the collateral the ECB accepts for its unlimited loans to banks, are aimed at supporting the real economy, economic growth and job creation. "We have to act within the limits of the treaty," Mr. Draghi added, noting the ECB must protect its own balance sheet.

The price of government bonds reflect the stressed conditions but they also serve as a signal for governments to act, Mr. Draghi said.

The switch by Americans from buying to renting homes since the financial crisis has been underlined by a surge in the construction of flats.

The development of multi-family units - a category made up of flats and townhouses - jumped 25.3pc last month to an annual rate of 238,000, the Commerce Department said on Tuesday. That helped drive overall construction on new homes up 9.3pc to an annual pace of 685,000, the strongest since the spring of 2010.

The better-than-expected figures were enough to cheer investors who have become accustomed to a flow of depressing news from the housing market since the bubble first burst in 2006. They also showed the degree to which the downturn is unwinding American homeownership, an objective of successive US governments since World War Two.

Ownership dropped to 66.9pc last year from a high of 70pc in 2005, and some are forecasting it will drop as low as 62pc as the hurdles to owning a home increase. "We expect the shift from owning to renting to persist for the next few years," said Michelle Meyer, an economist at Bank of America. She points to the prospect of further repossessions next year and the tougher criteria banks are now imposing on potential borrowers.

Thanks to the increase in activity, economists now expect residential investment to make a positive contribution to US growth this quarter for the first time since the crisis.

However, its impact is likely to be muted because the sector now accounts for less than 3pc of America's gross domestic product. And concern over the prospects for the housing market in 2012 were echoed in Tuesday's figures on the construction of new single-family homes.

Accounting for two-thirds of the market, they rose at a much more modest 2.3pc to an annual pace of 447,000. "Housing continues to bump along the bottom, facing a lingering overhang of supply and downard price pressure," said Lindsey Piegza, an economist in New York at FTN Financial.

November's annualised rate of construction on 685,000 new homes remains less than a third of the peak of 2.27m that was reached in January 2006. Should US consumer spending slow next year, efforts to quicken a revival in the housing market are likely to come onto the political agenda. With interest rates already at a record low level, the Federal Reserve has in recent weeks signalled that Congress and The White House should consider doing more.

141 comments:

What I found interesting with his graph is that the decline of US per capita income started right around the time of peak oil production in the US, and the bills for Vietnam came due, then reversed course during the North Slope Ak, and North Sea oil booms, only to dive again as we currently hit (approach?) peak oil worldwide.

Another thing to note about today's LTRO is that the ECB was rumored to be in the secondary market buying up Spitalian bonds soon after it was finished. That along with widening yields in these bonds was pretty damning evidence that the banks were not churning the money borrowed into peripheral EZ bonds, and the ECB has completely shot its wad to no beneficial effect (peripheral countries will still be serially downgraded to junk), except a little rally in short-term credit ex-ante. What next? 10 year repo loans? The only thing it can do is violate treaty and its mandate for price stability and print. With this latest DUD, it has just made that much less likely to occur within any meaningful time frame (i.e. before it's too late).

Here's some stuff about the situation of Finnish economy. Ugly story. Could add some extras - like how debt burden of the state is partly hidden in partially privatized parts of the state - which are not calculated into public debt burden. How convenient (>_<)

Last couple of days our media has been hyping big time how the consumer should (will?) save the economy the year 2012. Did my best to undermine this line of thinking when touring Southern Finland last week but had too few listeners to have real impact. Then again everything starts from small pebbles, we'll see...

Bubble-speak along the lines "the economy will grow again in 2013" makes me grin horrendously (ó_ò) ...also the fact that the Finnish Parliament will be in winter holiday till early February gives me a bad foreboding. Time to make big decisions that will be papered over later on?

I stumbled upon a very nice post from JMG's comment section, and it is very reflective of TAE's consistent message here. Namely, that we should always be aware of the "big picture" as well as our role in it. The big picture is complex, dynamic, multi-faceted and does not lend itself to simple labels, but at the same time it can help simplify our understanding very broad trends. It is a view of the lands and waters from the highest peak, so to speak, or the trees from atop that ever-darkening forest. The broad trend of most import right now is decreasing complexity and resilience for modern institutional society.

In this particular post, the author explains to us why he chose to go hiking up a mountain rather than participate in the Occupy Movements shutting down West Coast ports. In my view, he is not passing judgment on one or the other as being the "better" choice. He is merely recognizing that a broader reality always exists with more options, and we must constantly evaluate our own place in that changing reality. Here are a few select excerpts, but I recommend the whole thing (the last picture is both beautiful and symbolic of the message).

"Since the inception of the movement, I’ve been sympathetic to people who have called for specific demands, but unconvinced. Ultimately, I thought the lack of demands lent the movement a great strength. As soon as demands were introduced, they could be used to split apart the movement, to discredit it, and could become a flash point for a full-fledged attack from the movement’s enemies. All of which, I think, is true. Yet the part I wasn’t seeing as clearly was what Greer wrote. The lack of demands opens the movement to anyone who’s angry, which is damn near everyone. Not all will join, but the potential is there. In that sense, the movement was primed for growth. It seems not a coincidence, then, that it grew very fast from its inception.

But I can’t help but think there’s something more we’re facing here. Yes, we have an exploitative and brutal economic order and a corrupt and ineffective political class. Yes, we have a co-opted and bankrupt media and decaying national infrastructure. Yes, we have a societal and cultural order that is propped up by the underpinnings of domination and brutalization. And God yes, we need movements against these unfair and destructive aspects of our society. But what do we do when these movements get caught up in the same system? It’s a common refrain from the Occupy movement (though by no means a consensus) that we need to rebuild the middle class and create a fair economy that provides everyone an honest opportunity for a well paying job with benefits. But let’s be honest for a moment here. The middle class America that most of us envision when we talk about this is bullshit.

...I don’t begrudge the Occupy movement. Rather, in many ways, I cheer it on. We need the activism. We need protest. We need people who are willing to do whatever they can to try to stop this machine as it murders our fellow creatures, human or otherwise. But I also think we have to keep a steady focus on a future beyond that machine. It’s coming down, the machine–that’s inevitable. It’s fuel is running out and its structural integrity is degrading. What replaces it is a question of high importance and whatever the answer is, it’s going to be rooted in a future reality that is smaller and more local and far more connected to the landbase and the ecological sphere within which each individual exists.

I ask people not to lose sight of that. Protest, yes, absolutely, but don’t become too addicted to the intoxicating sense of power and voice. There is a smaller, quieter, but I would argue greater power in learning your land, connecting to the creatures of this world, and figuring out how to live and work well in this world. That is the ultimate struggle of our time. The machine we attempt to stop is simply the result of our failure to do this good work. We have to figure out our own lives and how to live them better–how to live them as properly as we possibly can–if we are to craft a future better than that machine. Otherwise, when it comes to a coughing halt, devoid of fuel and falling to pieces, all of us who spent our time only fighting will no longer have an existence. We’ll be lost, and in that loss will only be chaos–the vacuum where a meaningful and connected life should be, where our new culture is searching for purchase, for the nourishing soil within which it will grow."

Ref the Fishead video an entry or two back: A more meaningful social message would have been to show by your behavior that you are motivated by decency, honesty, fairness and a pragmatic longview rather than put on a smiley face without medications or being a psychopath.Like chitchat, a smiley face only goes so far....

Speaking of forests, I'm currently looking at the costs and benefits of environmental remediation. A country that shall remain nameless currently has guidelines to protect human health, and the government wants to know if they should develop some environmental guidelines to protect ecosystem processes. I had a call from a distressed colleague this morning about our assessment; she had received the results of the economic analysis and the economists had concluded that ther was NO benefit to be had from remediating or protecting the environment. When I questioned them, they reasoned that no-one would be prepared to pay for an intangible asset like 'clean groundwater' or 'fresh air', therefore the value of maintaining an ecosystem is not worth the economic cost.

My jaw dropped to the ground and I ended up writing the entire chapter myself in two hours. Screw that... I don't want the government listening to a fluff-brained sub-epsilon who genuinely believes that ecosystem processes can be substituted (apparently at zero cost) with technology.

Sounds like you have had an experience (or two, or three) with what Herman Daly would call, "bankable projects". This global capitalist system we have cannot conceive of adaptations, improvements, innovation, etc. unless those things provide a "bankable return" or "profit" to those financing and/or investing in it. That is a major facet of the predicament we are currently in, as increasingly few productive enterprises can live up to the excruciating and twisted standards of "bankable projects" in this time of global economic contraction. There is a massive disconnect between what needs to be done for systemic resilience and what the current system can "afford" to do through its profiteering structures of hellish bureaucracy and simplistic cost/benefit models. A lot of very good ideas and projects will be consumed by the logic of the profit system until that system loses all credibility, which is hopefully quite soon.

I ended up throwing in a few paragraphs about an increase in 'tanglible' values, and bleated on about an increase in the value not only of the land that has been remediated, but also an increase in the value of the land surrounding the site.

I've come to understand that 'increased land value' is probably the thing that will get the government to approve environmental guidelines, and all the discussion in the world about the value of ecosystem processes (which, imo, are the only true things of value) will be me wasting my breath.

It's interesting to see this level of detailed thought from a nest of "goldbugs". You convert your life's savings to gold, and a financial crisis occurs, (__ and then a miracle __), and then you emerge from the crisis rich! CD has concluded that the third step is still a little sketchy.

lautturi said......the Finnish Parliament will be in winter holiday till early February gives me a bad foreboding.

One can only imagine the crap that will get shoved through by various governments over the next couple of weeks around the Xmas and New Year break in the hope that the masses don't notice (not that much of importance captures people's attention anyway).

I think that words like Socialism, Fascism, Capitalism and Libertarianism are somewhat out of date. I mean, how exactly does one define a system that destroys inner-cities on a grand scale in the USA and that has been operational for many decades? I do not think that it warrants the label Democracy.

I found that part of his piece the most thought-provoking. The way that particular system operates has been very well documented. Professor J.W. Forrester - the guy who created the field of System Dynamics - wrote a book about it and built a model to describe it in 1969 - that famous year once more appears at critical points. The book is called Urban Dynamics. You can get the book for $3.47 at AbeBooks.com. I read it shortly after it appeared.

Since that part of the American puzzle has been thoroughly analysed, it is significant that no politician has proposed to remedy it using the approaches recommended by Forrester. Everyone who matters is quite happy with the way things are.

I hardly need point out that suburbia is destined to go the same way and doubtless nothing will be done to correct matters there either.

Ash said...I stumbled upon a very nice post from JMG's comment section, and it is very reflective of TAE's consistent message here.

Hi Ash, thanks for the link. The comment definitely resonates. The Occupy movement is great, but the feeling that it needs to be realistic, on a very deep level, about our alternate future is common. We cannot have BAU minus the corrupt political class/corporate controlled state. Society needs to ask some very deep and honest questions if we are to survive well.

Joseph Lieberman, the independent senator from Connecticut, sent a letter to Google CEO Larry Page this week expressing his opinion that Google-owned blogging platform Blogger should provide a button that would let readers of Blogger-powered blogs flag "terrorist content," according to a report.In the letter, Lieberman says that alleged pipe-bomber Jose Pimentel, who was arrested by the New York Police Department last weekend, used a Blogger-based blog to spread hate-filled screeds and links to bomb-making instructions.

"In what may turn out to be a really bad idea, Dutch scientists have created a strain of the bird flu virus that maintains its 60 percent kill rate and is easily transferred between mammals, and they’re looking to tell the world how they did it."

What a terrific idea. They take a strain of avian flu with a 60% kill rate in humans, but very difficult to transfer from human to human, and they modify its genome so now it is just as deadly but can be transferred in the office with just a sneeze, and they are going to publish all the details, including its precise genome structure, in a leading international science journal. Now why didn't I think of that. Brilliant.

(BTW, this is so stupid that I verified that it is not a hoax. Don't the Dutch have some large holes in their dikes that they can stick these morons heads in? I am starting to believe in Mayan astrology more every day.)

@El G, I was scratching my head over that new flu strain created in a lab. I heard on the radio this evening that the US gov't has asked that the research be censored. Also that the research was funded by the US military.Haven't had that verified but seems true as how else would the US gov't know about it. I started to think about why the US military would want such a flu strain but , oh well, too late now:) Lovely to see all that science education being put to good use:) As Ash says the funding for research on a killer flu must have proved " bankable " Hm-m-m

Dmitri Orlov: There are many uncertainties to how events might unfold, but Europe is at least twice as able to weather the next, predicted oil shock as the United States. Once petroleum demand in the US collapses following a hard crash, Europe will for a time, perhaps for as long as a decade, have the petroleum resources it needs, before resource depletion catches up with demand.

The relative proximity to Eurasia's large natural gas reserves should also prove to be a major safeguard against disruption, in spite of toxic pipeline politics. The predicted sudden demise of the US dollar will no doubt be economically disruptive, but in the slightly longer term the collapse of the dollar system will stop the hemorrhaging of the world's savings into American risky debt and unaffordable consumption. This should boost the fortunes of Eurozone countries and also give some breathing space to the world's poorer countries.

It is always interesting to read what Orlov thinks. I can't help wondering why he lives in Boston.

Like Montreal, Boston is a port. In the fortunate scenario where we don't completely blow ourselves up, or choke to death, or something similar, there should be some work to do carrying large containers on one's back to at least pay for a decent meal. That's my reasoning, don't know about Orlov.

They not only believe it, but it is the guiding principle of government agencies like the EPA. Their mission statement (statutory mandate) is essentially to balance the "costs" and "benefits" of regulation, remediation, etc., without having any good idea of what either of those include. The ambiguity and painstaking bureaucracy necessarily opens the entire process up to control by those with the most resources and most concentrated interest in outcomes (i.e. big industry). It's no coincidence that, since the EPA's inception decades ago, environmental contamination of air, water, soil, you name it, has only gotten worse. If you want to guarantee a species' extinction, put it on the US endangered species list.

I'm not sure what country you are preparing your report for, and I wish you luck, but I fear you are not going to have any. That is especially true in times of economic upheaval when everyone is focused on the immediate-term and no one wants to sacrifice "competitive advantage" to protect such *incosequential* things as the global ecosystem. Their #1 priority is to maintain the growth of their economy within the confines of our current industrial system, and that is and always has been in direct opposition to your goals.

In the longer-term, the collapse of the neoliberal economic model will prove beneficial to projects such as yours, to the extent that there is anything left to be and capable of being remediated. During this process of collapse, though, the twisted "logic" of economists may only prove to be a greater barrier to environmental protection at regional and national scales. It is the challenge of getting to the "long-term" that will be the most difficult.

"Travel chaos looms for many people heading to European destinations this Christmas. AP reports:

Strikes to protest austerity measures paralysed ground traffic in Belgium and hit Christmas travelers in several nations across Europe, promising days of headaches through the holidays. Workers were walking off the job to show their ire at budget-slashing measures by their governments to tackle debt and high deficits, and officials were scrambling to try to mitigate delays and cancellations."

@ AshWe need protest. We need people who are willing to do whatever they can to try to stop this machine as it murders our fellow creatures, human or otherwise. But I also think we have to keep a steady focus on a future beyond that machine. It’s coming down, the machine–that’s inevitable. It’s fuel is running out and its structural integrity is degrading. What replaces it is a question of high importance and whatever the answer is, it’s going to be rooted in a future reality that is smaller and more local and far more connected to the landbase and the ecological sphere within which each individual exists.

This is precisely the predicament of those of us living above the Marcellus and Utica Shales and fighting to keep hydrofracking out of New York State. Many in this area are already working on and living relocalization and reverence for all creation. But we face ruthless corporations, corrupt governments, and seas of ignorance. If we are to save what little we've managed to achieve over the past decades, we need to fight politically. Of course, the machine will collapse but, before it does, it can turn central New York into a toxic industrial hell.

Go back in history and look at archeological maps of settlements on a time scale.

Waterways (rivers) and safe harbors were magnets for early human settlement because moving really heavy loads over land was next to impossible.

Orlov and Kunstler have stressed this point over and over in their writings.

What ever economy survives the long, long, long emergency, it will gravitate to water, highways will slow to a crawl, even slower than a sailboat at 7 knots.

Rail line are the second easiest way to move large loads, hopefully to and from waterways and ports.

Check a map near you. Also remember that rail lines look for the least grade paths through your landscape. Old abandoned rail lines are still the path of least resistance, energy wise. Railway lines also make their own political alliances as they wind through the landscape. Geography often manifests itself as politics.

Seems a bit odd for Orlov to even entertain the U.S collapsing before Europe if I read the question put to him right.

If the question was a hypothetical; if gasoline was ten dollars a gallon in Europe and the U.S., who could handle the situation better, yeh, the U.S. would fold like a cheap suit.

The U.S bank mafia will definitely benefit if Europe goes down first, they are the financial incarnation of Hannibal Lector, the brilliant psychiatrist and cannibalistic serial killer.

"Relations between the European Union and Hungary hit a new low today.

The European Central Bank warned this afternoon that a draft law before Hungary's parliament would undermine the independence of its central bank. In a rare move, the ECB publicly criticised Prime Minister Viktor Orban's government for trying to take control of the National Bank of Hungary.

The ECB suggested that the country was acting unlawfully by changing the legal framework of its central bank. Orban's attempt to increase the number of deputy directors and members of the bank's monetary council is also seen as an attempt to undermine its governor.

The move came a day after S&P downgraded Hungary to Junk over the same issue.

Yesterday Hungary accused S&P of a deliberate attempt to undermine the European Union. Hard to accused the ECB of the same crime...""

No aspersions meant against the Netherlands itself, but it would productive if the people there dealt with this science team in the fashion I suggested. Perhaps you might suggest it locally. Regarding Scandia's comment this morning, I was thinking last night about who would fund something so incredibly dangerous, far more dangerous than anthrax weaponized spores, and of course the DoD came to mind. But one would imagine that they would have done it themselves at Fort Detrick. Discovering who issued grants for this work would be informative. Now if they can only come up with a safe and reliable vaccine for the anointed who are doing God's work, we would be all set to get the global population down to a more manageable 3 billion. Bird migrations are even more efficient than non-insect drone migrations. Get ready to short Tyson Foods and the human race :-(

It seems some commenters are not that familiar with the details of Dmitry Orlov's personal life. He and his wife and cat have been living in Boston Harbor for the last four odd years on a sailboat which he has been customizing in many ingenious ways for a post apocalyptic world, one of which is insulating it for a Boston winter so that it doesn't sweat and get muggy below deck. He writes on his sailboat customization extensively. He has a day job connected with computer programming and commutes to work on a bicycle. He fully expects to cast off from Boston when TSHTF.

"In his role as the head of the European Systemic Risk Board (ESRB), King said that the situation in Europe has worsened in the last three months (no argument there), with the real economy now suffering.

Speaking after the ESRB held its quarterly meeting in Frankfurt, King said:

'The overal situation has worsened as a result of the intensification and negative interlinkages between the sovereign risks and uncertainty about the resilience of the financial system and on the account of deteriorating growth prospects.

Orlov was dealing with peak oil - not peak finance. By taxing the hell out of petroleum for the last 60 years, Europe has developed far greater efficiency in terms of transportation, which is the largest consumer of liquid energy, both in terms of higher efficiency autos and viable mass transit. I think he also believes that Russian supplies of oil and NG will outlast the USA supplies from Middle East enclaves. Canadian tar sands are not viable in the future.

But as Stoneleigh always points out, we are going to see huge oscillations in the cost and availability of fossil fuels during and after the fiscal collapse until the final moonshot when petroleum will reach parity with silver.

Of course federal environmental regulations have made some progress in some areas. They have reduced concentrations of hazardous air pollutants in some areas, they have protected some species from extinction, they have cleaned up and restored some toxic waste sites, they have helped reimburse some disaffected parties, etc.

I never argued that the EPA has never done anything productive towards resolving environmental problems, because that would be ridiculous. What I said was that, on the whole, they have not addressed any of their mandates in any meaningful and sustainable way. The environmental law course I took last year was best described as a primer on all the ways the EPA has screwed up (or has been corrupted) over the last few decades, as well as Congress.

This is common knowledge, and it is no different from how all of our other federal institutions have, at best, failed to address systemically important economic, financial, geopolitical or environmental issues, and, at worst, have greatly contributed to these systemic failures with malicious intent. The EPA is just one small part of a broadly corrupt and dysfunctional machine.

Since that flaming pinko, Richard M Nixon, started the EPA, most forms of traditional toxic pollution were abated for a while. The EPA took a huge hit under Reagan with the James Watt fiasco, then recovered a bit in dogooding until W, who filled every agency with troglodyte industry shills causing a large number of resignations by conscientious scientist / lower level administrators. Obumma, the great blackface populist is, of course W squared as usual. So I would have to go with Ash if viewing the present situation instead of its total history. Just looking at the ongoing destruction of West Virginia with mountain top removal proves the case. It is inexcusable. Furthermore, what protection still exists is despite the EPA and enforced by state agencies. The current ban on frakking in northern NY State is an example.

Ron Paul and his fellow libertarians argue that a flammable Cuyahoga River could be prevented by the enforcement of property rights through the courts, but history does not bear this out.

True enough. Guess I should have named Ann Gorsuch instead, but the brain gets foggy when it peers back to medieval times.

From Wikipedia:

Greg Wetstone, who was the chief environment council at the House Energy and Commerce Committee during the Reagan administration and later served as director of advocacy at the Natural Resources Defense Council, said Watt was one of the two most "intensely controversial and blatantly anti-environmental political appointees" of American history. (The other was Anne Gorsuch, director of the EPA at that time.)[

@antwhisperer, @ash, the dialog of value added or 'bankable return' is false.

Industrial production creates a container for- or representation of illusory collateral for lending -- generally on the account of the public (commons). These borrowed funds are distributed to the industry's managers/owners.

Labor is required to repay or service the loans.

In any regime profits (surpluses of money) are borrowed, industrialization does not earn and by empirical observation is unable to.

I popped into my local music shop this aft. A small place, 8 customers and its crowded.A man was deciding out loud not to purchase the Krupa and Rich CD because he really only wanted to listen to Rich. When he left the store I met the eyes of another customer who said, " Well if he only wants one drummer he should have picked Krupa." I agreed and so began a conversation. Others came and went, a bit like a X-mas drop in of music lovers.The woman who came in to pick up a special order left the store clutching her purchase to her heart, eyes ablaze with joy that she had found " It ". At one point, reluctant to leave, I stood still and thought, " Life doesn't get a whole lot sweeter than this."May the season offer up some sweet moments to TAE, to the board, to the lurkers out there...

I agree. My point was simply that it is what the capitalist system requires of its participants to start and sustain any productive venture (i.e. get the necessary financing/capital and regulatory approvals), and there simply aren't many "bankable projects" left now that we have surpassed peak financial activity, even by the false measuring stick of monetary return on investment. That is especially true for projects that do not produce returns in very short time frames, i.e. anything other than HFT algo bots trading financial instruments and derivatives back and forth, or outright theft from the 99.9%. So the capitalist profit system inherently prevents that which could save it, or at least save the global industrial system (i.e. transitioning away from fossil fuels to alt energy sources decades ago and preserving/rehabilitating natural ecosystems).

WASHINGTON — The U.S. government asked scientists Tuesday not to reveal all the details of how to make a version of the deadly bird flu that they created in labs in the U.S. and Europe.

The lab-bred virus, being kept under high security, appears to spread more easily among mammals. That has fueled worry that publishing a blueprint could aid terrorists in creating a biological weapon, the National Institutes of Health (NIH) said

"So the capitalist profit system inherently prevents that which could save it, or at least save the global industrial system (i.e. transitioning away from fossil fuels to alt energy sources decades ago and preserving/rehabilitating natural ecosystems)."

I might add that alternate energy sources would not move the world away from fossil fuel use, that would be additive and merely result in an energy/resource collapse all the more more complete. We are great financial can kickers but we could do better at kicking the energy/resource can down the road ... it's just lucky we aren't. Maybe there will be something left for someone down the road.

Robert Roos News EditorJan 14, 2004 (CIDRAP News) – One of the worst fears of infectious disease experts is that the H5N1 avian influenza virus now circulating in parts of Asia will combine with a human-adapted flu virus to create a deadly new flu virus that could spread around the world.

That could happen, scientists predict, if someone who is already infected with an ordinary flu virus contracts the avian virus at the same time. The avian virus has already caused at least 48 confirmed human illness cases in Asia, of which 35 have been fatal. The virus has shown little ability to spread from person to person, but the fear is that a hybrid could combine the killing power of the avian virus with the transmissibility of human flu viruses.

Now, rather than waiting to see if nature spawns such a hybrid, US scientists are planning to try to breed one themselves—in the name of preparedness.

The Centers for Disease Control and Prevention (CDC) will soon launch experiments designed to combine the H5N1 virus and human flu viruses and then see how the resulting hybrids affect animals. The goal is to assess the chances that such a "reassortant" virus will emerge and how dangerous it might be.

CDC officials confirmed the plans for the research as described recently in media reports, particularly in a Canadian Press (CP) story.

I'll admit that it's exceedingly hard to understand the global economy in big picture terms, and on the one hand it would seem that in terms of energy and resources, the collapse of any one of the three major economies (USA, China, EU) would depress aggregate demand for resources leaving the other two in an advantageous position. But it seems to me that the collapse of any one of the three would serve as the necessary shove to push either the stagnant and over-indebted EU or USA, or the growing and over-leveraged China off the cliff. We are like three fat guys roped together forced to climb a mountain that only gets steeper as we climb. When one falls, the other two will quickly follow.

Am I wrong? Hasn't globalization and globalized ponzi finance in particular set up multiple crisscrossing daisy chains of counter party risk, brittle and inflexible supply chains, and massive levels of absolutely credit-dependent industry and agriculture. Seems to me that the stair-step contraction/decline is going to be awfully damn bumpy for damn near everybody...

"We are like three fat guys roped together forced to climb a mountain that only gets steeper as we climb. When one falls, the other two will quickly follow."

Great analogy!

I believe you are correct. Part of TAE's message has been that credit money serves as the lubricant in the globalized system, matching buyers and sellers, producers and consumers. In that sense, a daisy-chained financial collapse will make it difficult for everyone to allocate the energy/resources that are still available to the places they need them to be.

OTOH, FOFOA makes the point that, once the dollar is toast (which he believes to be a lot sooner than we do), gold will either have to bid for commodities such as "black gold" directly, or currencies of nations/blocs that are implicitly backed by their gold reserves will serve that purpose (the latter being Freegold). Although I do not agree with his prediction of a sustainable Freegold system emerging, I believe that the former point is a generally accurate assessment.

That's part of the reason why there is a good argument that Europe will fare much better than the USA after the financial collapse, dollar HI and when peak oil looms. The Euro region has larger private/public gold reserves and has started to make it a more easily exchangeable monetary asset for real goods/services, although they still have quite a ways to go.

It's important to remember, though, that all of this is far from certain and it will be messy for everyone. Given the high probability of resource wars and rapid sociopolitical and environmental deterioration all around the world, it's definitely not going to be a portrait of Europeans driving around in Beamers 20 or 30 years from now while the Americans are back to the horse & buggy.

As I mentioned earlier, I think Orlov's prediction was based on oil getting tight and he didn't weigh in peak finance which makes a prediction at lot more complicated. Also, unless gold goes up to $50,000 an ounce, the total world reserves is not going to buy the world's oil for very long.

This whole gold thing really perplexes me - it's basically a useless element. Good for plating stereo patch cord terminals. What is it about humans that mesmerizes them with it? Very strange.

Even if the gold reserve idea is correct, it is still a hard one to figure. Most of Germany's gold is physically in the USA. Finders keepers. I think at some point it will be discovered that Fort Knox has a lot more tungsten than gold, though it will be a very interesting sequence of events before that could be brought to light. Only if Ron Paul were elected and managed to stay alive for at least a year afterwards, both very unlikely events. Anyone know where Gaddafi's 144 tons of gold went?

@ --- and the avian flu virus

That CDC project seems to be a different project though with the same apparent goal. I can only ascribe the most insidious motivations for both these projects, as I can't imagine why or how they would be positively useful. Why would you have to develop a super contagious strain to develop a vaccine? Doesn't make any sense. If it mutated in the wild to a human to human strain, it could be totally different than what they are doing in the lab. And how would they test the efficacy of a vaccine? The risk of killing hundreds of millions of people are enormous with one dumb misjudgment. Sounds much more virulent than the Spanish flu virus of 1918 which reputedly killed 50 to 100 million.

Gold has and can act as a placeholder of value in a large-scale system of production and trade, similar to what debt does today. Instead of surplus producers shipping their commodities/goods to others for debt-assets that are re-invested into more debt-assets, they will do so for a claim on gold.

I agree that the global industrial system will collapse as oil becomes much too valuable a commodity to extract and export at anything resembling today's fiat prices. Yet, if any large-scale production and trade is to continue to exist between countries or regions after debt-based fiat paper has become worthless, gold is the only logical monetary asset to serve as the vehicle. There is a very good chance that virtually no large-scale economic systems will exist when it's all said and done, but that will take some time to play out.

We could see very high valuations of gold for purposes of both local and international trade as the financial system completely fails but the industrial system still remains sputtering to some extent. I would rate this factor as one of the least important ones in terms of why Europeans would fare better than Americans during the height of peak oil, with all of the things Orlov mentions coming first, but just wanted to add it as one possible factor to consider.

"Why would you have to develop a super contagious strain to develop a vaccine? Doesn't make any sense."

One thing leads to another.

THE WHITE HOUSEOffice of the Press Secretary

For Immediate Release October 24, 2009DECLARATION OF A NATIONAL EMERGENCY WITH RESPECT TO THE 2009 H1N1 INFLUENZA PANDEMIC

BY THE PRESIDENT OF THE UNITED STATES OF AMERICA

A PROCLAMATION

On April 26, 2009, the Secretary of Health and Human Services (the "Secretary") first declared a public health emergency under section 319 of the Public Health Service Act,42 U.S.C. 247d, in response to the 2009 H1N1 influenza virus. The Secretary has renewed that declaration twice, on July 24,2009, and October 1, 2009. In addition...

On November 1, 2005, I announced the National Strategy for Pandemic Influenza, a comprehensive approach to addressing the threat of pandemic influenza. Our Strategy outlines how we are preparing for, and how we will detect and respond to, a potential pandemic.

Since then, our Nation has taken a series of historic steps to address the pandemic threat. In December, the Congress appropriated $3.8 billion. The International Partnership for Avian and Pandemic Influenza, which we launched at the United Nations in September 2005, has encouraged openness and coordinated action by the international community. Here at home, we have made major investments in vaccine and antiviral development, research into the influenza virus, surveillance for disease in animals and humans, and the local, State, and Federal infrastructure necessary to respond to a pandemic. By making these critical investments, the Federal Government has begun strengthening our ability to safeguard the American people in the event of a devastating global pandemic and helping to prepare the Nation’s public health and medical infrastructure.

Building upon these efforts, the Implementation Plan for the National Strategy for Pandemic Influenza ensures that our efforts and resources will be brought to bear in a coordinated manner against this threat. The Plan describes more than 300 critical actions, many of which have already been initiated, to address the threat of pandemic influenza.

Our efforts require the participation of, and coordination by, all levels of government and segments of society. State and local governments must be prepared, and my Administration will work with them to provide the necessary guidance in order to best protect their citizens. No less important will be the actions of individual citizens, whose participation is necessary to the success of these efforts.

Our Nation will face this global threat united in purpose and united in action in order to best protect our families, our communities, our nation, and our world from the threat of pandemic influenza.

At current 1600 an ounce and oil about 100 a barrel, have you ever tried carrying 16 barrels of oil about in your back pocket? Gold seems pretty useful to me, saves wear and tear and oily back pockets, right?

"Also, unless gold goes up to $50,000 an ounce, the total world reserves is not going to buy the world's oil for very long."

And that is what trade is for, so one doesn't have to buy all the world's oil, let alone for very long. Of course one needs something to trade with unless one lives off capital. But then I see there is a tungsten problem there?

"I think at some point it will be discovered that Fort Knox has a lot more tungsten than gold,"

I take it you mean that the US Government is selling off it's gold (to China, or? ) and replacing it with gold plated tungsten bricks or bits and pieces when we have lived in paper since Nixon. Hey man, right about now we should have have a little 9/11 chat.

@El G, Thanks for the Taibbi article /the Christmas messages from the 1%. Did you note that Taibbi speaks of " conscience", that the 1% have no shame, do what a person of conscience is unable to do. Hate to be a bore but these comments lead us back to psychopathy. The behaviours and attitudes described are classic descriptions of psychopathy.We, those with no skin in the game( and don't get me going on that!), really need to comprehend this condition as it is destroying our societies, corrupting life sustaining systems.The alliance of financial war lords and government has us looking over our shoulders, trying to cover our asses, whilst rabid dogs tear at the constitution, at all democratic institutions, at the essence of fair play itself. If their manufacture of a killer virus doesn't crash through one's denial I don't really know what it will take.Ya I know the " message " is that they created a death tool to protect me.Research , so far, indicates that psychopathy is an incurable disease, comparable to a dog with rabies. Is it really such a stretch to label their self aggrandisement as a " rabid " ideology? Psychopaths in power do not just suck money/wealth, they suck energy, they maintain an unlevel playing field. The price of a win in that rigged game is your soul.Faced with an incurable condition that threatens to consume the world as we know it I consider it both prudent and urgent to contain the infected percentage of the population. Isolation is mandatory and the sooner the better.And as how the 1% have self selected it shouldn't be too difficult a task to locate them. The challenge will be to penetrate their private defences.

I can demonstrate how very useful a plague could be. Just not for you.

We've arrived to the same page on the Russo interview, right?

Cybercash for all? What better way to implement the system than to contaminate the material article?

A plague upon the money.

FWIW I have been of the opinion for years that all this debt mayhem has not been the grand, vaudevillian slip on the fiscal banana peel the owners pretend it has been. Rather, utterly deliberate. Like how concrete doesn't pulverize into fine flour before it hits the ground, you know? Even though that event is widely regarded as an accident?

Within the 680 pages of the Congress-approved National Defense Authorization Act for Fiscal Year 2012 are a lot of provisions that the American public might be peeved over if they could comb through all the contents.In addition of establishing the ability for the president to detain and torture his own citizens indefinitely is also a tiny clump of text which will provide for the commander-in-chief to, once and for all, legally attack the enemies of America over the Internet.Under the controversial defense spending act that is awaiting approval from US President Barack Obama, lawmakers can give the Executive Branch the go-ahead to wage a war over the Web against any nation deemed a threat to America. Specifically, Section 954, “Military Activities in CyberSpace,” states, “Congress affirms that the Department of Defense has the capability, and upon direction by the president may conduct offensive operations in cyberspace to defend our nation, allies and interests.”

I believe you are misdiagnosing the sociopathy/psychopathy of the "1%" as steeming from some innate biology rather than modern socioeconomic structures, and therefore prescribing ineffective and perhaps harmful medicine. Also, we always do well to remember Nietzsche's quote in "Beyond Good and Evil":

"He who fights with monsters should look to it that he himself does not become a monster. And when you gaze long into an abyss the abyss also gazes into you."

>>We are just beginning to realize that we have overdeveloped the material aspect of existence at the expense of the deeper emotional and spiritual aspect, and we are paying the price for that error. It is one thing to talk about degeneration of moral and spiritual fiber in America today, and another thing to do something about it.

The place to start is within ourselves. Look carefully inside, truly and objectively, and each of us will see moments when "I am the punk" and "I am the crazy". We will learn to see those moments, see them clearly, cleanly and without condemnation, and we will be on our way up and out of being so.

You can't make radical changes in the pattern of your life until you begin to see yourself exactly as you are now. As soon as you do that, changes flow naturally. You don't have to force or struggle or obey rules dictated to you by some authority. You just change. It is automatic. But arriving at the initial insight is quite a task. You've got to see who you are and how you are, without illusion, judgement or resistance of any kind. You've got to see your own place in society and your function as a social being. You've got to see your duties and obligations to your fellow human beings, and above all, your responsibility to yourself as an individual living with other individuals. And you've got to see all of that clearly and as a unit, a single gestalt of interrelationship. It sounds complex, but it often occurs in a single instant. Mental culture through meditation is without rival in helping you achieve this sort of understanding and serene happiness.<<

end of quote from "Mindfulness in Plain English". You can download a free, completely legit copy of the whole book from

One frequent theme of the commentariat is change of oneself from within oneself. And I agree that this is the only meaningful change. On the highest metaphysical level, it is really the only game in town, and perhaps why we are put on this dirt ball. Physicist and metaphysicist Tom Campbell deals with this in great detail. But the trick to the matter is that we are social animals and do not live in a vacuum or an isolated Himalayan cave, even one with wall to wall carpeting. Thus changing ourselves from within must alter our interactions with our fellow creatures. Campbell simplifies the question by stating that right intention is far more important than right action, but the stronger one's right intention becomes (which he defines a lowering of spiritual entropy), the less faulty one's right action. But as we in the "west" plummet into hard, totalitarianism, how to deal with others gets more complicated. May I suggest a reviewing of the recent, excellent German film, The Lives of Others, coming to a city near you.

re gold

Yeah. I am as familiar as most with the multi-millennial history of gold and how most humans regard it as intrinsically valuable. But having been deranged in my youth by "the summer of love," sometimes I just step back and look at things through the "wrong" end of the telescope. The truth of the matter is that gold is one of the least useful of elements to human well being, when divorced from our racial and neurotic obsessiveness. Its practical uses are rather negligible. As an artistic medium it has some value due to is pleasant sheen, malleability, and corrosion resistance. Now iron and copper are really useful to humans at a certain level of technology unless one is an excellent chert knapper. I do know that gold is rare and less perishable than a bin of potatoes. And since the human condition places such a high value on it per gram (reflexively), it is easily transportable. And yes, I know gold is going to play a big part in the future of finance. I might even pick up a little of it myself. I also constantly deal with colored pieces of paper that have little, and in Mexico, no absorbent value, but I often see these interactions as that of social primates doing strange rituals. I just wanted to point out how **intrinsically** absurd it is. If you don't get it, well, that's OK also.

Well, I am not allowed to discuss 9/11 on this site. And that's OK because there are several excellent and informative blog sites packed with Ph.D. physical scientists, civil engineers, and architects, where I can discuss it fruitfully. But since we were discussing whether Fort Knox really has the gold claimed or whether it was stolen from the American eater many decades ago. I will just respond to it very briefly. Nixon slammed the gold window shut in 1971. "The year 1970 was the crucial turning point, because foreign arbitrage of the U.S. dollar caused governmental gold coverage of the paper dollar to decline from 55% to 22%." But is the ratio between paper FRN and the gold reserves really important? FRN's form a minuscule portion of the money supply, even of M1, not to mention M2 or M3. The problem was the French were running a trade surplus and de Gaul wanted the difference in gold at the end of each year as Breton Woods allowed. The USA purportedly still had more gold reserves then any other nation. So why did Nixon slam the window in 1971? Or to quote Wimpy, "If you sell me a hamburger today, I will gladly pay you Tuesday." Second, Ron Paul, backed by the libertarian movement, has been demanding a proper audit of "the people's gold" since he was elected to the House, . What would be the harm of a proper audit? It would cost less than the US government spends on research of male geriatric erectile dysfunction each year - really. Yet it hasn't happened? Why not?

But Peripety, why did you bring up 9/11 when we were discussing gold reserves? I can only assume that it was to discredit me as a "conspiracy nut," so let me make a few comments about this in general. These comments could just as easily be applied to the global financial Ponzi, so I am back on topic blogwise. I am more interested in conspiracy facts than conspiracy theories. However, if you collect enough facts, you often don't even have to connect the dots. The dots themselves become lines. Any successful totalitarian regime knows that if they must enforce their system solely with the muzzle of a gun, they are in big trouble. The force of unconscious myths which are, ipso facto, heretical to dispute, must form the first and most important line of defense of the system. And the more people who publicly question the myths and deceptions, the less power the myths have to lock reality away from the minds of the populace in general. At some point it becomes a "legitimate" question. So the regime knows that they must stamp it out as early as possible. Undoubtedly, there is a reality to the psychiatric illness labelled paranoid schizophrenia, which affects well under 1% of the global population, and people afflicted with this condition do develop schemes which are truly divorced from reality. But this relatively rare condition is stretched into a huge blanket for the regimes to cover their plans and crimes.

Try an experiment if you live in the USA. Walk up to ten very typical acquaintances and ask them, "Did you know that Congress just passed a bill which will be signed by the president any day into law that makes it legal for the president to order the murder of any US citizen anywhere in the world, without charge? That the entire United States has been legally designated as a war battlefield in perpetuity and that an American citizen may now be legally arrested by the military in his home, and thrown into a concentration camp for life without charge, indictment, or a trial?" I bet that most of them, if you truly chose a typical assortment, will look at you as a total nut. They will back away from you as if you were a carrier of the new and artificially constructed avian killer flu virus and make a few meaningless grunts. Welcome to the lonely world of the "conspiracy theorist."

So Peripety, I make you this suggestion to keep your world view intact. Buy a rosary, and when you get up in the morning and go to sleep at night, instead of Hail Mary's, try this catechism of George Orwell twenty times each:

"I just wanted to point out how **intrinsically** absurd it is. If you don't get it, well, that's OK also."

Was talking to my wife about a teenage girl who had her father buy her a 1000 dollar camera, nice lenses and all. I suggested that the utility of that camera might one day be zero and would not be tradeable for a 20 dollar shovel or hoe. She might get more utility out of a 100 dollar camera and half an ounce of gold. She could have someone take a picture of how clever she was to have that gold in order to trade it for any number of hoes rakes and shovels. I quite agree one doesn't get any first hand nourishment out of gold, though it does make a dandy candy wrapper.

@Ash, There are many names for the ruling eite- "white shoe boys", gamblers.criminals,psychopaths or monsters. Take your pick...All I'm trying to do is identify/name the dark forces.In the past in other cultures the tribe has exiled the people whose actions undermine the well being of the tribe. There are religious groups who employ shunning. I see isolation as the least violent response, the least bad karmically for myself. I'd rather fill the FEMA camps with corrupt banksters and politicians than people who can't pay their debts or people who oppose the trashing of the constitution.

As I just posted, if you don't get my metaphysical point about gold, that's OK. Apparently not. I made it quite clear that I think that it will play a major part in the financial future of the world despite its intrinsic absurdity. However, I do not think it a panacea for the average person, and Stoneleigh explains this far better than I could.

I hold Bhante Gunaratana to be one of my teachers, one of those who’ve helped me develop a worldview grounded in Buddhist principles. I also read TAE daily. And so sometimes—when I imagine a bleaker, contracting world—I create thought experiments in which my worldview is tested by a totalitarian world.

Some of the principles from which I try to operate include: seeing things clearly, just as they are; recognizing the interdependent nature of existence; minimizing the compulsion to attach to (whatever) as a basis for a satisfactory life; recognizing the facts of impermanence, existential suffering, and the illusion of a fixed self; realizing the necessity of compassion; and honoring that all unskillful behavior—greed, hatred, and delusion—stems from ignorance.

In my thought experiments, I test these principles. What would I do, for example, if roving bands of armed, hungry people invaded my home and stole my store of black beans and rice? I imagine myself inviting them in, sharing it with them willingly, calling on them to remember that we are all connected… I get that far, then stop.

I do not own a weapon. I do not know how I would respond to the threat of rape or injury if I withheld food or money. I don’t know how I would respond to a jack-booted thug…

But I do know this: working at the practices embodied in "Mindfulness in Plain English" and other similar texts begins to point to a certain mental clarity. These meditation practices promote clear-seeing, and clear-seeing promotes skillful response. Response—or action—cannot be separated from intention. The true nature of any action follows directly from the nature of the intention behind the action; intention always precedes action. Our understanding of our intentions is often unavailable to us because we choose not to examine them, or we are ignorant of the relationship. Various types of sitting meditation help grow our ability to clearly see our intentions.

Yes, life in a totalitarian world may be more complicated, so clearly depicted in "The Lives of Others" as suggested by El G. But the clear-eyed-seeing that is the fruit of meditation, concentration, and insight has a way of cutting through complications and informing both intention and action.

In "The Confession," starring Ben Kingsley, the Kingsley character advises the Alex Baldwin lawyer character thusly: "Doing the right thing is easy; what's difficult is knowing just what is the right thing to do." Seeing clearly makes that difficulty much easier.

Some would argue that the entire human construct of placing "objective" values or meanings on material objects in the Universe is absurd. Certainly, any attempts to find underlying value or meaning in a system that transforms absolutely everything of the Universe into a "commodity" and a means to a monetary end is absurd. Alas, that is the system we have for the time being.

re: "conspiracy theory"

Very nicely said, El G.

scandia,

I understand, but disagree. IMO, we shouldn't think in terms of who goes into the FEMA camps and who doesn't. No one needs to be forcefully "isolated" from our tribe because a) we don't have a tribe, b) it won't do any good and c) it only serves as a means of isolating ourselves from our better nature. And we certainly shouldn't create an arbitrary line between "us" and "them" based on statements of current net worth and corresponding labels of psychopathy. What needs changing is the entire system, and, as others have already said, that really begins and ends with changing oneself. If a few laws and constitutional amendments are upheld in "productive" ways in the meantime, I won't object, but I'm not holding my breath, either.

When I was in my 20s I felt under-dressed if I wasn't wearing a $200 shirt. It was entirely brainwashing, and I'm embarrassed to admit it. I've swung so far the other direction, however, that I only own second-hand clothing, or blue jeans that are now a minimum of 3 years old with sexomatic holes in the crotch. Unfortunately, my selection of stylish underwear is no better. Problem is, clothing is so exorbitantly over-priced. Eventually, I'm just gonna have to give in and buy something so I don't look quite so bum-like. Just interesting to me how far my ideas have changed, thanks in part to places like TAE. A whole new fashion aesthetic, to say the least.

@scandiaIts more complicated than just detecting and isolating dominant sociopaths, to remove them from power. Society itself projects a sociopathogenic mentality in the whole population by cultural induction of its value-systems, which generates a constant supply of fresh unconscionables and subjugate semi-sociopaths to fill vacant power positions which demand special skillsets of ruthlessness.

Its true that clustered sociopathy within government is a growing problem. Innate modalities of anti-social conduct are progressively manifested by self-selective socio-economic motivators predominantly propagated within institutional power structures, perhaps more intensely during institutional collapse.This anti-social modality is found in all sedentary civilizations and is not an artifact of modern socio-economic conditions, although the optimal size and interconnectivity of sociopathic clusters may have adapted to a more complex insitutional environment. The effects of clustered sociopathy within global society may not cause more than 10-15% of the worlds problems overall, with some periodic exceptions, most evils are still committed by otherwise moral people.

Non-transient ethical dysfunction does preclude representative governmental agency. While defined psychopaths may be dismissed from public office on grounds of ethical dysfunction, they cannot reasonably be politically persecuted to the extent that would restrict employment outside of public office. This kind of policy mostly leads to discriminatory political persecutions, such as if mental conditions themselves were to be criminalised.

It would be reasonable to restrict clinically defined sociopaths or psychopaths from public office or ethical agency of government, being effectively without detectable conscience or moral memory. However, it may not be possible to clinically define the relevant anti-social personality disorders within arbitrary parameters of professional conduct. Some measure of psychometric screening could be employed for particularly vulnerable positions within government to filter out supect personality profiles, if the condition could be adequately defined and detected without misdiagnoses and false positives.

Although such power positions themselves may cause anti-social conduct to spontaneously manifest within most persons occupying them as a result of the embedded institutional demand for unconscionability, a permanent psychometric screening protocol for certain government offices should partially decompile the senior strata of clustered sociopathy by diminishing the double coincidence of sociopathic wants, which may improve the social quality of policies, given enough time. Its unlikely that such a protocol will be legislated in the current environment, as congress and the courts seem afflicted also, its far more likely that any active structures of clustered sociopathy will become unprofitable and largely dissolve along with the systems leveraged social complexity.

BTW, you might not have noticed ,on gold, I seem to be agreeing, or at least not disagreeing, with you in my last post and not metaphysically either.

Also BTW, if right intention is more important than right action then what has happened to US liberty and justice? Same as what is happening up here with Herr Harper I guess. His 'good' intentions do not result in right action IMO. What is that old saw about the road to hell and it's brick work of good intentions. The bricks must have had a centre core of tungsten, eh?

I largely agree with Ash' position, but we may not have the time to pursue individual massfulness and spiritual betterment in our local environments if we're to be politically purged and shipped off to concentration camps for being in some dissident database, which could be the kind of policy to be implemented if the sociopathogenic field reaches sufficient intensity. One must be aware of such possibilities according to emergent historical patterns, but not overly anxious or hateful towards the presumed perpetrators. Policywise such persecutions are not an entirely sociopathic affair and require willful collaboration or inaction by the majority of moral people, which may not be forthcoming. Spreading reciprocal massfulness helps prevent societal animosities from turning genocidal during economic collapse, including when dealing with ethically challenged people.

The US military does seem to be mobilising for total societal collapse and military rule, including the utilisation of those FEMA camps as political prisons, perhaps even as extermination centres. If it does become undeniably apparent that a criminal syndicate has seized control of the country and is planning genocides on the citizenry, it would become a priority to remove the regime from power by whatever means would minimise civilian casualties, such as a constitutionalist military counter-coup.

"but we may not have the time to pursue individual massfulness and spiritual betterment in our local environments if we're to be politically purged and shipped off to concentration camps for being in some dissident database, which could be the kind of policy to be implemented if the sociopathogenic field reaches sufficient intensity."

I agree with you that we may not have the time to rely solely on such "betterment", depending of course on how much time it actually takes, which will vary from person to person and is most likely an ongoing endeavor. It is also arguable that the "sociopathogenic field" has already reached its boiling point of sufficient intensity, and no amount of top-down corrective measures will change that fact. And there never really is a better time to strive towards "mindfulness" or spiritual betterment than now, even though embracing that fact is much easier said than done.

By no means am I suggesting that there is no other option but to engage in some extreme form of "pacifism", in which we casually watch ourselves and those around us be rounded up and slaughtered. Back to absurdity and Camus, I believe the latter provides great insight into the issue at hand. Although he was an ardent critic of international capitalism, he refused to support the post-war Communist Parties and ideology because their end of terminating a system of ruthless capitalism simply did not justify their means of ruthless oppposition.

In fact, he argued that the end can never justify the means, but rather the means must justify the end. Nevertheless, he did continue to believe in active rebellion (resistance of oppression) and, more importantly, revolution (systemic change). The difference now seems to be that our window of opportunity for the latter has drastically narrowed from his time, but perhaps that has always been the case. To get from rebellion to revolution, then, we must work [be intent] on understanding and revolutionizing ourselves.

While good intentions may occasionally lead to hell, bad intentions are a far quicker and surefire way of getting there. If one defines good intensions to a head of state as the general welfare of all people s/he was elected to serve, to ascribe good intentions to either Obama or Harper would be a bad joke.

"Some would argue that the entire human construct of placing "objective" values or meanings on material objects in the Universe is absurd. "

Yes quite right, human evolution has not reached the point where we can walk about as stoned on the universe as any unicellular animal is and still get fed clad and sheltered. Till then, at best, it is the Marx Brothers and in particular, Duck Soup.

I found that a shocking statement. IMHO, Clothes when bought online or in ordinary shops are extraordinarily cheap by historical standards - thanks to the Chinese, Indians, Pakistanis, Oil and so on. I mean, one can get brand-new cotton blue-jeans for $10 - not much more than the price of 20 cigarettes.

In my hedonistic youth, I used to travel to London from the Middle East twice each year - partly to buy clothes in Kings Road. Sadly, I had to abandon my wardrobe in Iran. I would love to be able to show my kids what sort of clothes their boring dad used to wear. The stuff shops like Cecil Gee, Biba and Lord John used to have belongs in the Victoria and Albert Museum :)

" ... to ascribe good intentions to either Obama or Harper would be a bad joke."

Sorry, I don't think it is a joking matter. Unless these two guys are complete psychopaths, and acting in what they feel is strictly to their own advantage, I imagine that they do think they are acting with good intentions. What they value as good and what you or I do is another question.

TRy watching Lang and Oleary on the CBC to see my point in action. Kevin is a jewel! (sarcasm on)

Thanks all for your comments regarding the US EPA. I am lucky enough to be involved in international environmental projects, including some in the US. My experience has been 'intersting'; in many of the proposed fracking developments I see, short-term gain is not only at significant longer term cost, but also the definition of 'gain' is, from the numbers I've been privvy to, debatable. In addition to this, the quantities of fossil water a well will need to discharge to get an acceptable return is eye-popping, and I don't need to comment on the fluids used for drilling.

Other areas which are supposedly regulated for the greater good, but which would seem to be swayed towards big business include the areas of food management and clean-up of petroleum hydrocarbon spills. Finally, one of the most disturbing things I've seen recently has been the lobbying of PTFA and PFOS producers regarding the safety of these polymers. These companies have not been held accountable by the agency which is supposedly the governmental regulatory body.

As mentioned, in times of economic hardship, the last thing people want to worry about is the environment. However, we see great things coming out of recessions... people are forced to be more frugal, to work with their communities and to reduce the conspicuous consumption. I am a pessimist at heart, but I hope that the abyss into which we are about to tumble head-first may bring some positive environmental benefits. I can only hope.

Clothes are exorbitantly expensive IMHO because there is a worldwide glut of cheaply made stuff choking the aisles of acres of abandoned shopping centers...and I certainly can't find new 10 dollar jeans where I live. Deflation may be further advanced in your neck of the woods.

Megan thinks Greece will walk first. Prior and current, I do not know anything about Megan Greene and didn't read any comments from ZH, but she seems to have knowledge in this area. Is she an up and comer?

Back to my question...if you think the link is worth a watch...do you think Germany will walk first, Greece will walk first, or it's even more complicated than just these two choices?

WARNING: Megan is nervous in this interview and her voice is somewhat monotonic...but I think she presents facts.

What if we remove the descriptors "good" and "bad" from discussion of behavior?

Instead, what if we used the words "skillful" and "unskillful," where "skill" is defined as ways of being that do not contribute to the physical suffering or deluded mental anguish of self or other, and "unskillful" the opposite?

The intention behind skillful behavior arises from the living realizations of compassion, loving kindness, and clarity. The intention behind unskillful behavior arises from the living ignorances of greed, hatred, and delusion.

Thus, it doesn't matter how Obama (or anyone else) labels his intentions. If he operates from a place of universal compassion, loving kindness, and clarity, then his intentions will give rise to skillful behavior that does not add to the weight of suffering in the world. In my opinion, Obama may be called unskillful. His lack of skill stems from his ignorant operating stance from a place of greed, hatred, and delusion. For us, it doesn't really matter if he is aware of this and doesn't give a shit, or if he is cluelessly unskillful, the consequence is the same. It does matter for him, however. If he wakes up from his ignorance, he decreases his potential for being a source of suffering and increases his chances for a more satisfactory existence. And vice versa.

Everyone has experienced the mental anguish of delusion; everyone has has experienced physical suffering. Thus, we are in a position to determine if an action is unskillful. Means and ends are inextricably bound through intention, the place from which the mind operates. An attempt to separate them stems from an ignorance of their interdependence.

BTW, whatever applies to Obama applies to me. And you. The only difference between Obama and me, really, is that the ripples from his ignorance are bigger and last longer than mine. But I can assure, my ignorance also ripples out in unskillful behavior.

I meant to say when the effects of peak oil production are felt in the global economy through very high oil prices. The consensus here is that the global financial crisis is destroying enough demand to forestall those effects and will continue to do so for some years to come, while also setting up the conditions for a sharper supply collapse in the future due to severely depressed investment in expanding/maintaining energy infrastructure.

Peripety - I think the interview presents useful information about how the can might be kicked further down the road than a lot of people think and how this might be more "orderly" than many think possible. But the end result is still a breakup of the euro. Fiscal union or Eurobonds are the only hope to keep it together and neither is likely to happen.

Regarding "growth" - do you completely dismiss the possibility of periods of cyclical growth within the greater secular period of contraction?

Its telling that the comment that the USA .mil forks are doing the prep work for repressive action did not receive much comment...its almost taken as a given now that we will face some very nasty ,very direct action by "the powers that be" as a reaction to the coming disruption of of our BAU life's.

The "Occupy" movement is not going away.It will morph,and change,most likely faster than the powers that be can respond.At that stage,when the power structure feels most threatened,is when I expect to see the extreme stuff happen.

How much...how bad...as gravity points out "sociopathogenic field" will vary...

Will you be in a place of relative benign effects..or will you live in the shadow?...

Or will we,by virtue of our participation in this and other forums have already had our file marked "red"? .

I won't be online over X-mas and did not want to go away without getting to why I struggle to find a path through the spiritual teachings and the context of this life time. I just recalled advice once given my a gestalt teacher. He advised me to know where I am right now. This is where I am right now.When I perceive injustice,fraud,torture,corrupted political systems,etc a feeling wells up within me. Havel might say I suffer from a thousands pricks of conscience. I think " This is wrong." Where it gets dicey I also believe that I am supposed to do something to make it right again.

"I meant to say when the effects of peak oil production are felt in the global economy through very high oil prices."

Dear Ash,It is my interpretation of the data that the effects of being at, or approaching peak oil have already been around for sometime now - at least 10 years. Also believe that it is ongoing instability in oil markets, not absolute price levels that is the main destructive factor at work.

I and my collaborator Mike the Mechanic did a Fourier transformation analysis of oil price volatility since 1999 and find that price has been spiking every ~2.5 years or so e.g., last two spikes August 2008 and April 2011. Moreover we find that key economic indices and political polling data are downstream from and locked into the oil cycle.

"I meant to say when the effects of peak oil production are felt in the global economy through very high oil prices."

Dear Ash,It is my interpretation of the data that the effects of being at, or approaching peak oil have already been around for sometime now - at least 10 years. Also believe that it is ongoing instability in oil markets, not absolute price levels that is the main destructive factor at work.

I and my collaborator Mike the Mechanic did a Fourier transformation analysis of oil price volatility since 1999 and find that price has been spiking every ~2.5 years or so e.g., last two spikes August 2008 and April 2011. Moreover we find that key economic indices and political polling data are downstream from and locked into the oil cycle.

Well put! But trying to figure out what is going on in someone else's head passes the time and is a must for the modern, successful novelist.

Nassim

"In fact, I tried loads of expensive jeans that did not fit me - I don't have an Australian outline."

Perhaps the problem is that you haven't undergone the surgery yet for your marsupial pouch addition.

Snuffy

I am certain that the more outspoken regulars here have already had "their files marked." The only question being is what rank they are given on the general priorities round-up list. New internet rulings coming before Congress shortly (SOPA) would allow the oligarchs to shut down dissenting web sites rapidly. I think it no accident that the troops are being pulled back form Iraq and Afghanistan. I have also read that non-coms are given sophisticated psychological tests to see how likely they are to resist when told to turn their guns on fellow, unarmed Americans, and the ones with the "best" grades being transferred into NORTHCOM. As a last resort, the Oligarchs will use mercs from other countries (perhaps Hessians :-)

Re: Megan Greene video

When viewing or reading an economic pundit, I have to break down their comments into the "is" and "should" categories. A pundit can be fabulously insightful in the "is" category and come off like a 10 day old fish head left in the sun in the "should." This was recently discussed here in some detail in regard to AEP. Mish could be another example. Mish is one of the finest macroeconomic analysts going in the "is" department, but when the "shoulds" break out, he is a beast. If the "free market" dictates that seven year old kids work in sweatshops 14 hours a day for peanuts, then it must be good because God decreed that the will of the "free market" is good. One of the reasons I am an ugly feature on this blog is that not only are I&S superlative in the "is" department, but their "should" is the general welfare of the 99%.

It is interesting and useful to analyze the prime directive of each pundit to see where and how their "shoulds" are constructed. AEP's prime directive is the survival of the banking elite and the City and the perpetuation of the British class structure. Mish's prime directive is the general hard core Ayn Rand libertarian agenda, and the destruction of labor unions in particular.

That said, back to Megan Greene. First, she works for Roubini and is neo-Keynesian. And neo-Keynesians want the central banks to increase the credit supply forever. Keynes's original redeeming feature, in principle anyway, was that he wanted the extra sovereign debt sucked up and paid off in times of expansion and plenty, but this just never happens. And one could detect a mild wistfulness on Greene's part for the implementation of Eurobonds and warp speed printing. As to growth, all Keynesians believe in perpetual growth - it's part of the catechism.

But she really has a very solid and insightful grasp of the real problems of the Eurozone and its political realities. She is not blind to the fact that current austerity measures will force the peripheral nations into deeper depression and civil unrest in a positive feedback loop. (Economist and economic pundits, despite their pretensions as physical scientists, never seem to get the proper sign of feedback loops correct).

What I found most interesting about her comments was the strength of the fear of the German people about inflation and HI. I didn't know that Buba had a framed 1,000,000,000,000 Reichsmark bill prominently displaced in their lobby. All the prominent USA libertarian, quasi Austrian pundits say that when the shoe falls, the ECB will print at warp speed. But Greene says probably not. And being a Keynesian, she says this with some wistfulness. I found that the most interesting part of the interview.

The air Jordan stampedes are another sign of our times. Same as Black Friday after Thanksgiving. Same as shootings at universities or restaurants. If you need more proof that financial hardship will not be handled well here in the US, there are many more signs. More people than ever are carrying concealed.

Ash, I prefere to think not of ‘high’ prices for fuels but of ‘unaffordable’ prices for fuels. Right here and now regular is $3.29.9/gal which is relatively cheap considering typical wage is over $13/hr. There was an old picture of a dozen men (some nicely dressed) standing in front of a filling station and the sign posted “gas 25 cents“. The caption was, “Not one man in this picture makes over 25 cents per hour.” There are many places in the world where gas is unaffordable but not right here yet. I can very well remember not having much money in our family, but we got by and we will get by when TSHTF again. EMP or nuclear attack KYAG.

I would like to thank P01 and others for postings about amateur radio. I used to have an extra class license and greatly enjoyed Morse Code. I let it drop years ago when cell phones and internet became popular. I am going back to it now and will get my extra class ’Ham’ license back. Even though it is not required now, I got a code program from the internet and already up to about 10 WPM solid and will be at 25 WPM soon. I know you can buy a Morse ’texting’ hardware and program for the computer <-> ham radio but what fun is that? Also, iambic paddles have replaced my old Vibroplex ’bug’ so I will upgrade. With sun spots increasing we should be able to communicate round the world on 20 watts of CW.

I probably wouldn't want to survive that, anyway. I'm not that good at eating long pork, but undoubtedly many are and will survive. Whether it's good or not, moral or not, it has and it will happen again. I'd rather not participate, though.

I remember we had a similar discussion earlier in the year. I find your analysis very interesting, but am still skeptical of your hypothesis. It seems the question is whether endogenous financial dynamics are influencing price volatility in leveraged commodities such as oil, or whether exogenous oil shocks are driving economic/financial developments, or perhaps a combination of both. I&S, Dr. Keen and others have argued that price volatility is characteristic of periods of financial instability and debt deflation, such as in the late 80's, late 90's, 2007-08 and now.

I tend to agree with them. Heightened periods of sociopolitical unrest can also be explained by those dynamics. However, I am open to the possibility that oil supply shocks in the past also fed into already established periods of financial instability, making them more intense, and peak oil supply issues now could be doing the same. However, to accept your underlying premise, it seems we would have to assert that the current global financial crisis would not have occurred but for the price volatility resulting from peak oil issues, and most theory/evidence I have reviewed does not support that assertion.

"There is nothing 'modern' at all in Modern Monetary Theory. It is the same old fish wrapped in slightly different paper. The godfathers of Modern Monetary Theory are John Law, G.F. Knapp, J.M. Keynes, and most lately Alan Greenspan. But its roots go back to any ruling group that ever debased a currency or seized private property by fraud.

It is in the nature of a Ponzi scheme. As long as its sphere of influence can keep expanding, and the force by which people are compelled to accept it is maintained, a fiat currency will 'work.' But as its expansion slows, as outlying regions begin to resist it, the currency begins a slow but deadly spiral of collapse that accelerates into a final reckoning and reissuance.

Fiat currencies *can* work well in theory, but in reality they require the indefatigable dedication of people of extraordinary virtue, courage, and wisdom. And so they have failed. Always.

And it most certainly will not work with the craven and self-serving leadership which the Anglo-Americans have today. It is almost a cruel joke to promote such a system. And yet there it is and here we are. What comes next will be interesting."

There were 92 bank failures in 2011. There are 973 institutions on the Unofficial Problem Bank list.Last year there were 157 bank failures. What has not been reported were the merges and acquisitions that did not show up on the FDIC lists.

Therefore, the financial system must be getting better.

;-)

If you believe in bigger is better ...If you believe in growth forever ...If you believe in leverage (printing) ...

Honestly, what I find most surprising is the sea-change in my own attitude toward clothing. I had a professor who insisted that status was an even more powerful instinct than our sex-drive. Clothing and the value we attach to its look and label is surely a part of that. I find the whole thing ridiculous now, but it's taken a while. My wardrobe now largely consists of hand-me-downs and holey jeans, although I am still compelled to try and restore some semblance of an acceptable/attractive appearance. It's not for warmth alone that I went bargain-jeans shopping. I expect in the not-too-distant future, however, looking like a bum will be a necessity to avoid being mobbed by the hungry.

Same for the peak oil thing. Clearly we are not going to see the massive crunch envisioned if the economic clusterf*ck had not happened.

However, Brent is sticking pretty stubbornly to $100/barrel. (WTI is bogus, has been for a while, and will be until they build the pipeline _out_ of Cushing.)

That is high enough to incent marginal producers with costs as high as $75/barrel. They have not come out of the woodwork. Maybe they don't exist, eh? Alberta is still booming. Maybe the market is there.

I distinctly both Ilargi and el G, getting downright pissy about the imminent collapse of the price of oil back in 4Q08 and 1Q09. It did blip under $50, but not for long.

While $100, unlike 2008's $150 is not enough to be a drag on high tax Europe, it is high enough to be a drag on the rest of the world (not just North America) where taxes are and historically have been, much lower.

I do believe that peak oil (we all agree that production will never exceed July 2008) is having a real effect at the margin. I am also coming to believe that the TAE pravda is "We have a really cool hammer, so everything that affects the economy must be a nail."

I haven't personally done very much predicting here about oil pricing over the last several years except that if the USA and Israel attack Iran, and Iran can keep the Straits of Hormuz locked down tight to tankers which is probable and maybe even take out a lot of Gulf infrastructure with missiles, then it will go through the roof. Duh!! $200-300. I agree with Stoneleigh regarding oil over the next 20 - 30 years. I&S switched their primary focus from oil to finance because they saw that the finance hammer would hit a lot sooner, and they are proving to be right.

I agree with I&S that oil will be under $35 when the Greatest Depression really gets rolling. How much longer can the politicians and the central bankers kick the can down the road? Well they managed a lot longer than most of us here thought. If you give a half year for the sucker rally in March 2009, then so far 2.4 years and counting.

But it is more complicated than that. The USA, EU, and China are creating huge government deficit debt to try to balance the collapse of shadow banking debt. The USA is totally hollowed out. The Oligarch's are preparing for massive civil unrest which they will counter will a brutal police state crackdown, spearheaded by a military which will use the same tactics in Baton Rouge that they did in Baghdad, and a highly militarized, formerly civilian police force. The equities markets are rigged tighter than a magnetized roulette wheel and really don't signify much. How much longer before we see an implosion, which means the giant banks going belly up again and demanding another giant bail out? I think it is going to be soon and that the kick off will be in the EZ.

Also, I think the collapse of Rome is a very bad model for timing. Rome ran on hay and slave power - not oil and electrons. Like comparing the Pony Express to email.

"Regarding "growth" - do you completely dismiss the possibility of periods of cyclical growth within the greater secular period of contraction?"

I think the growth you are talking about is volatility. Without increased energy and other resources we have reached the end to the sort of growth we have experienced. Now if you wish to talk to me about the growth in writers poets artists and musicians then growth and wealth distribution is still possible, but sorry, no Lamborghini's at least not without off-loading more low end consumers.

"I&S switched their primary focus from oil to finance because they saw that the finance hammer would hit a lot sooner, and they are proving to be right."

Fair enough, finance is how the players keeps a resemblance to honesty amid all the rapaciousness, but it is oil and resource depletion that are driving that hammer. Give us another and brand new earth, add a bridge to leverage it and any thoughts of collapse or battles with Iran will disappear like one awakening from a cheesy nightmare.

Actually you caught me in a brain fart. I was just looking at the periphery. I think Germany will bail about two weeks before Italy.

Peripety

I&S would disagree with you. Financial expansions and collapses can happen totally independently of resource depletion. The South Sea Bubble and the American Great Depression are prime examples. The US had barely begun to deplete its natural resources, particularly black gold, when the financial hammer hit.

Perhaps the problem is that you haven't undergone the surgery yet for your marsupial pouch addition.

El g,

Too late for that - I've been 76-78Kg for 40 years. :)

I learnt something last weekend when we saw an Echidna wondering a grassy area near a hut we stayed at. It lays eggs and is the only mammal besides the platypus to do so. Apparently, it split from its platypus ancestor 19-48 million years ago. I wonder what humans will look like in one hundred years, if that.

Cognitive Dissonance over at ZH has written a nice essay expanding on a theme Stoneleigh has included in her talks:

It's interesting to see this level of detailed thought from a nest of "goldbugs". You convert your life's savings to gold, and a financial crisis occurs, (__ and then a miracle __), and then you emerge from the crisis rich! CD has concluded that the third step is still a little sketchy.

*************

Cognitive Dissonance said:

I see and hear a great deal of cognitive dissonance among those who promote Gold as the way to salvation, all while ignoring or dismissing the idea of governmental confiscation of said Golden chariots. It’s not like doing so would be totally unprecedented in the US (or on other plantations for that matter) since President Franklin Roosevelt’s April 5, 1933 Executive Order 6102 did precisely that, promptly followed by a revaluation of said confiscated Gold to push the anal probe that much further up the rear.

*******That's only one flaw in his "theory" about gold and the history of gold-so to your post I'll respond to that-

Roosevelt confiscated gold for only one reason-To stop the bank runs that he knew would be coming-You see back then people had the right "by constitution to exchange their paper certificates ie: USD's for gold and leave the bankers to deal with bankruptcy on their own-if they should be so foolish to lever up credit against the amount of gold they held-which is what happened and the banks had extended credit (margin) way beyond fractional reserve limit simply did not have the depositors gold and a bank run would have exposed the fraud-

Today-there is no danger of a bank run through gold-so by not comparing that huge difference in dynamics-his theory is flawed-

I did agree with some of his stuff-but he seems to point to a hyper-inflationary event as the only outcome-

Here's my theory-At some point a major currency-likely not the USD- will begin to collapse-likely the Yen or EUR or who knows which one-but i think at some point a major bond market will puke and so goes the currency and the only way to stop it is to weight to gold and "if" that happens-it will be the kiss of death for all of them who do not match that weighting-"If" that happens-governments will want to bring gold into the market-not drive it underground or offshore-

To semi quote a poster- Why do people who hold little or no gold make so much noise about it-Is it akin to whistling past the graveyard?

Pretty much the same as they do today. Maybe a little smaller due to poorer nutrition, maybe a little selection against blonde ozzies, but there is flippin' empirical evidence (can you say Iceland?) that creating a new landrace of human beings takes 500 years or more. (And after 1000 years they still look like a Viking raped an Irish chick. Wonder why....) If you want a 'breed' as in my Tamworth pigs or (American)Devon cattle, the discussion among the cognoscenti is whether it takes 10 kiloyears or 20.

I agree with you that gold confiscation in not such a threat today as it was in FDR's time, and rather capital controls are much more of a threat by countries experiencing a flight from their currency. However, the response to HI by central authorities has always been to print more money in higher and higher denominations. Perhaps some countries will back their new currencies by gold in the aftermath, but very unlikely during the process of HI.

It is also important to remember that HI in peripheral countries, such as Greece, will lead to debt and currency deflation in central parts of the global economy, such as Japan and the US. If a country such as Japan were to experience a bond market collapse and currency HI, then that would only strengthen the deflationary effect on the dollar. During such a process, it would not make sense for the US to create a gold shortage on top of the already present cash shortage by weighting to gold, i.e. create the conditions which led to revaluation/confiscation during GD1 in the first place.

I don't comment very often here as I'm frequently too busy reading the comments which are as valuable as the posts themselves. This is one of a few places where I get the real news.

This one caught my eye as a harbinger of what's to come as far as the possible outlawing of cash is concerned. It can easily be justified on the basis of minimizing tax evasion or reigning in terrorists. Either way, what these guys want is to extract tribute and just be able to shut someone down with a few keystrokes if they feel they have to. I'm not sure how the illegal drug trade will play into all of this, but I guess it's easy enough to legalize, bring it into the virtual money regime and tax it.

America is probably further along in the use of virtual money than Italy. I can't imagine that forcing people into electronic money is going to go over without a hitch though. Folks are going to get pissed and there's a great potential of social unrest behind that especially when one considers that this tax grab is just another form of austerity for the benefit of the banks.

>>>Italians are the euro region’s least-indebted consumers and among its biggest savers, according to data from the European Union’s statistics office, Eurostat. Their frugality may be at least partly linked to a distrust of paying with anything other than cash. Italian credit-card holders use their cards on average only 26 times per year, or five times less than in the U.K., according to the Bank of Italy. <<<

This excerpt from the Bloomberg article is very telling as well. When cash transactions are a part of the culture, then the banks get cut out of a very important piece of business--the transaction fees on the credit card charges. So, forcing more transactions into an electronic form raises yet another "tax" that goes directly to the coffers of the banks which is a major impetus behind pushing this all over the globe. If Italians are using credit cards at 1/5th the rate of Great Britain, that's a lot of money on the table. Monti is a real dirtbag.

Perhaps some countries will back their new currencies by gold in the aftermath, but very unlikely during the process of HI.

**********I agree with everything you say if HI is "allowed" to proceed unabated-What I'm pointing out is that a gold weighting would stop HI/currency abandonment-dead in its tracks-

Debt is nothing more than a promise of past malinvestment to be paid for in the future by production of real capital-Debt was created by the stroke of a pen and can be discharged by the same pen-

Politically-HI of a major currency would be unacceptable because of the public ramifications-

If a country was to default on its debt or a good portion of it and weight the currency to gold-the reverse contagion for every country/currency to compete would be forced by the safehaven currency traders-which would head for the gold and sell off any non backed currencies ie: The CHF- prior to their EUR peg during those wicked flight to safety runs that we've seen suddenly erupt-

As for what good it would do governments to confiscate gold-here's a sobering look at how much public interest has been towards gold-There is 160,000 tons of it "somewhere" certainly not in the hands of the public-

Figure 1 in this essay shows that every US recession and stock market crash of the last 50 years has occurred proximal to and just downstream from an oil price shock. However, IMO the most interesting case is that of Black Monday in 1987-the biggest ever 1 day drop in the Dow. The cause of Black Monday remains mysterious as it occurred during an economically stable period - e.g., US GDP was steady and growing. However, if one looks at Figure 1 it is notable that Black Monday occurred in the wake of an oil price shock caused by a transient political disintegration of the OPEC cartel in 1986.

Obviously, the OPEC-induced 1986 price surge was not caused by financial instability and/or debt deflation. But more importantly, if this oil shock did trigger the largest stock market crash ever, where would a reasonable chain of logic place the cart and horse in this specific case during the 50 year story told by the Figure?

I tried to answer him by taking an empirical stab at the question. To do this barley prices were examined in the run up to and following the 1929 crash - for which there are quite good records (unlike for the Dutch Tulip mania). In the 5 year run up to and following 1929 the action in barley prices were actually quieter usual. Indeed, prior to 1920 and after 1935 volatility was significantly increased. This is n= 1 - but nonetheless these data do not seem to be consistent with Dr Keen's hypothesis.

Overall, my view of mechanism is similar that expressed by Peripety

"Fair enough, finance is how the players keep a resemblance of honesty amid all the rapaciousness, but it is oil and resource depletion that are driving that hammer."

It is suggested that Peripety's metaphoric hammer blows from oil market instability are real and that our Fourier transformation analysis indicates that this hammer has been slamming into the economy once every 32 mnths since the early to mid 2000s.

Since you appear to be a scholar on the fractional reserve nature of the US currency, perhaps you can give me a link to the answer of the following question. I have spent over an hour trying to draw a bead on it to no avail. After the Federal Reserve Act of 1913 was signed into law, Federal Reserve Notes were still redeemable, a least in theory, for gold at the price of approximately 20.6 dollars per troy ounce. This, of course, was abandoned by FDR in 1934. But in the period from 1914 to 1934, what was the running fraction of "the people's gold" to redeemable FRN's in circulation? And how did one practically redeem his FRN's for gold bullion? I did find the fraction on Wikipedia, that at the time that Nixon slammed shut the gold window in August, 1971, the ratio was 22%, and that it had fallen rather rapidly from 55%. And as a bonus question, what was the fractional reserve ratio of federal bills from the Gold Standard Act of 1900 to the start of the Fed?

I also learned the following factoid. The Federal Reserve Act of 1913 was original called the Glass-Owen Act, and was ramrodded by then Representative Carter Glass, the same Glass who, as a Senator 20 years later, sponsored the more meritorious Glass–Steagall Act of 1933. What a tangled web we weave.

My main issue with your analysis is that you simply assume market crashes (i.e. asset price deflation) are lagging indicators of economic recession and financial instability. Therefore, there must be some identifiable preceding cause for the crash.

However, Minsky's financial instability hypothesis suggests that people don't even realize financial instability is building up until the asset markets crash, and then a recession/depression usually follows. I find it hard to believe that the reckless real estate speculation of the 80s and the dramatic slowdown of home sales in 1986 was not a significant factor and/or driver of the Black Monday crash.

After that, we had the savings & loan crisis and a recession. There may have been many other factors involved in Black Monday as well, but your argument would dismiss the influence of all of the exogenous drivers and place it almost solely on the exogenous 1986 oil price spike. With regards to the lack of price volatility of barley in 1929, why would we expect there to be any? Leveraged commodity vehicles have only become heavily used in recent times.

To preemptively clarify, when I say the above, I mean you assume that we would find evidence of economic recession and instability preceding a market crash if people like Minsky and Dr. Keen were correct. However, that is not true.

Thanks for the Xmas present. Three pages of Stiglitz will be entertaining tomorrow. I think he's a Keynesian and that immediately draws criticism. I'm not from any particular "camp" but I like coming across writings from Mises & Minsky. Thanks again.

After the Federal Reserve Act of 1913 was signed into law, Federal Reserve Notes were still redeemable, a least in theory, for gold at the price of approximately 20.6 dollars per troy ounce. This, of course, was abandoned by FDR in 1934. But in the period from 1914 to 1934, what was the running fraction of "the people's gold" to redeemable FRN's in circulation?

*******el g--I am not a scholar of anything-i have an elementry understanding of as much of all of this shitshow as is possible for me-You asked likely the most important question there is to understanding-Gold-Credit and FRB in relation to where we were back then and where we are today-

I'll give you a rough overview of how the events unfolded and a few links that will help-but the best thing to do imo-is read some books about it-

http://www.acting-man.com/?p=102http://www.acting-man.com/?p=2165

I only know of two books-which actually go back this far-99.9% of people think gold standard ended in either 1934 or 1971--it actually ended in 1922 at a little known conference called "the Genoa Conference" http://en.wikipedia.org/wiki/Genoa_Conference_%281922%29and the unsyruping of it all began in 1913 on Jekyll island-as you know

When the US foolishly engaged in WW #1 they had to come off GS in order finance the war effort "print"-but promised the people that when the war ended they would reinstate GS-they did and because of war debt and GS-they had to ship out actual gold for payment-which threw all the warring countries into a severe deflation- (which was what the founding fathers intended GS to do to a nation foolish enough to fight a foreign war)

In April 1922 it was agreed to by world central banks with the blessing of governments to "double count" gold reserves-They did this by counting the actual gold reserves and the paper currency in existence "as" Gold reserves and then issued/printed enough new currency to match the new "paper gold"Poof--the world money supply was doubled in one day-but the new credits aka "paper gold" (the birth of the paper derivatives of today and it was distributed to--you guessed it--the Central banks/USFR controlled the flow and they immediately lowered the fed fund rates and started to "lend" at low interest to commercial banks which started to distribute credit mostly in the form of easy margin leverage but still credit by any other name-which as we know goosed the markets and the inflationary roaring 20,s and the resulting crash-

this link shows what happened when the US reinstated GS-the massive deflation the loss of Gold caused and the rocket launch out of it with the doubling of the money supply-

http://bit.ly/ryONvI

So finally to your original question-

Post 1922--the ratio of real gold reserves to circulating paper claims had been cut by 100%You could redeem FRN's in gold-but only in very large bars-which cut out 90+% eligibility of redemption (except for the very rich)You see-just like today-we do not have the reserves to cover deposits/money claims-